Question

T&J manufacturing has a factory that produces custom kitchen cabinets. It has multiple product lines. Materials and labor for the cabinets are determined by each job. To simplify the assignment, we will assume the following average costs. The materials include $1,000 for the wood and other direct materials of $200. Both items listed are on a per job basis. It requires 20 hours of labor on average for a custom kitchen. The hourly rate is $10. The sales price will be set at a markup of 65%. The company estimates that it will have 16,000 direct labor hours in total for all product lines. It assumes 800 units are sold on average per year. A breakdown of estimated yearly costs related to the kitchen cabinets follows: Salaries- office & administrative $ 520,000 Salaries for factory personal: $ 220,000 Office Rent $ 125,000 Factory Rent $ 20,000 Office Utilities and Misc office expenses(based on units sold) $ 20,000 Sales Travel(based on units sold) $ 24,000 Insurance - office $ 12,000 Depreciation - office equipment $ 40,000 Depreciation for factory equipment $ 70,000 Advertising $ 20,000 Sales commissions(based on units sold) $ 45,000 Factory Property taxes: $ 10,000 Maintenance for factory equipment: $ 80,000

7. If the following changes were to be made, calculate a new CVP Income Statement: Direct Material costs decrease by 10%; fixed costs increase by 15% and sales price would increase by 5%. Assume you are selling the 800 units. Should the company consider these changes? Why or why not? This question is not just based on the new net income. Please review the full income statement for changes. What if the sales volume changes? Does this change your answer? I would recommend using volumes higher and lower to see how the changes impact your answer. Include any CVP income statements that are needed to support your answer. Discuss real examples of cost increases for fixed costs (at least 2) and decreases for direct materials (at least 2) that could be implemented for this business. Can the company increase price? What other areas might be impacted due to the price increase? You are the CFO of this business what is important to consider? Give 2 industry specific details that can impact this discussion.

SHOW WORK please!

Answer 1

Cost Volume Profit (CVP) Income Statement for a year	$
Particulars	Current	(Revised or New)
Sales Unit	800	800
Labour Hour	16,000	16,000
Sales (a)	38,37,900	40,29,800
Variable Cost :
Direct Material Cost
(1200*800)	9,60,000
(1200*90%*800)		8,64,000
Labour	1,60,000	1,60,000
(20*800*10)
Office Utility & Misc. Exp.	20,000	20,000
Sales Travel	24,000	24,000
Sales Commision	45,000	45,000
Total Variable Cost (b)	12,09,000	11,13,000
Contrubution (Sales - Variable Cost) (a - b)	26,28,900	29,16,800
Fixed Cost :
Salaries - Office & Admin	5,20,000
Salaries-Factory	2,20,000
Office Rent	1,25,000
Factory Rent	20,000
office Insurance	12,000
Depreciation on office equipment	40,000
Depreciation on factory equipment	70,000
Advertising	20,000
Factory Property tax	10,000
Maintenance favtory equipment	80,000
Total Fixed Cost ©	11,17,000	12,84,550
Net Profit ( Contribution - Fixed cost) (a-b-c)	15,11,900	16,32,250
Contribution to Sales Ratio (contribution/Sales)	68.50%	72.38%
Net Profit Ratio to Sales	39.39%	40.50%
Notes :
1) Sales for current period shall be at a markup of 65% (Assumed markup on cost) ((1209000+1117000)*165%) = $ 38,37,900
2) Fixed cost increased by 15 % (1117000*115%) = $ 12,84,550
3) Assumed all other variable expenses shall not be changed.
4) Sales price in current period is (3837900/800) $ 4,797.38. This price shall be increased by 5% then new sale price to be
(4797.38*105%) $ 5037.25 and total new sales is $ 40,29,800 (5037.25*800).
Should the company consider these changes?	Yes, as both contribution and net profit ratio have increased.
What if the sales volume changes?	If sales valume changed then variable expenses also shall be changed
	in same direction and contribution too. But fixed expenses shall be same.
	overall net profit will be same or above as currently.