In: Accounting
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.
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.
SOLVE ALL PARTS WITH EXPLANATION
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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. | ||||||