Question

Part 1

The vice-president of sales and marketing, Madison Tremblay, is trying to plan for the coming year in terms of production needs to meet the forecasted sales. The board of directors is very supportive of any initiatives that will lead to increased profits for the company in the upcoming year.

Instructions

a.  Waterways markets a simple water controller and timer that it mass-produces. During 2020, the company sold 350,000 units at an average selling price of $8 per unit. The variable expenses were $1,575,000, and the fixed expenses were $800,000.

• 1.What is the product's contribution margin ratio?
• 2.What is the company's break-even point in units and in dollars for this product?
• 3.What is the margin of safety, both in dollars and as a ratio?
• 4.If management wanted to increase income from this product by 10%, how many additional units would the company have to sell to reach this income level?
• 5.If sales increase by 71,000 units and the cost behaviours do not change, how much will income increase on this product?

b.  Waterways is considering mass-producing one of its special-order screens. This would increase variable costs for all screens by an average of $0.71 per unit. The company also estimates that this change could increase the overall number of screens sold by 10%, and the average sales price would increase by $0.25 per unit. Waterways currently sells 491,740 screen units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,661,352 variable and $794,950 fixed.

• 1.If Waterways begins mass-producing its special-order screens, how would this affect the company?
• 2.If the average sales price per screen did not increase when the company began mass-producing the screen, what would be the effect on the company?

SOLVE ALL PARTS WITH EXPLANATION

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
Part a
1			Total	Per Unit
Sales	350,000*$8	a	$ 2,800,000	$          8.00
Less: Variable Cost		b	$ -1,575,000	$        -4.50
Contribution margin		a-b=c	$ 1,225,000	$          3.50
Contribution margin ratio		d=c/a	43.75%	43.75%
2
Contribution margin				$          3.50
Contribution margin ratio				43.75%
Fixed Cost				$   800,000
Break event Point (Units)	Fixed Cost/CM			228,571	Units
Break event Point ($)	Fixed Cost/CM Ratio			$1,828,571
3
Margin of Safety	Sales-BEP Sale		$     971,429
	$2,800,000-$1,828,571
Margin of Safety Ratio	MOS/Sales		34.69%
	$971,429/$2,800,000
4
Sales	350,000*$8		$ 2,800,000
Less: Variable Cost			$ -1,575,000
Contribution margin			$ 1,225,000
Less Fixed Cost			$    -800,000
Existing Operating Income			$     425,000
Increasein Operatin Income	$425,000*10%		$        42,500
Since Waterway operating above BEP, increase in Operating income will require same incresae in Contribution Margin
Hence, Units increase Required	$42,500/$3.50		12,143	Units
5
Since Waterway operating above BEP, increase in units will increase Contribution Margin
Hence, Operating income will increase by	71,000*$3.5		$     248,500
Part b
Existing Income Statement:
		Total	Per Unit	%
Sales	491,740*$26.5	$ 13,031,110	$          26.50	100%
Less: Variable Cost	$6,863,512+$2,661,352	$ -9,524,864	$        -19.37	-73%
Contribution Margin		$    3,506,246	$            7.13	27%
Less: Fixed Cost	$2,050,140+$794,950	$ -2,845,090
Existing Operating Income		$       661,156
New Income Statement:	New Volume	491,740*1.1	540,914
		Total	Per Unit	%
Sales	540,914*($26.5+$0.5)	$ 14,469,450	$          26.75	101%
Less: Variable Cost	$19.37+$0.71	$-10,861,553	$        -20.08	-76%
Contribution Margin		$    3,607,896	$            6.67	25%
Less: Fixed Cost	$2,050,140+$794,950	$ -2,845,090
New Operating Income		$       762,806
The change will increase Operating income by $101,650, however will bring down CM Ratio from 27% to 25%
Part b2
New Income Statement:	New Volume	491,740*1.1	540,914
		Total	Per Unit	%
Sales	540,914*($26.5)	$ 14,334,221	$          26.50	100%
Less: Variable Cost	$19.37+$0.71	$-10,861,553	$        -20.08	-76%
Contribution Margin		$    3,472,668	$            6.42	24%
Less: Fixed Cost	$2,050,140+$794,950	$ -2,845,090
New Operating Income		$       627,578
Contribution Margin will drop ti 24% from 27% and Profit will also drop by $ 33,578.