Question

Antin Art Co. produces high‐quality paint sets for artists. Each paint set sells for $57. Operating income for 2017 is as follows: Sales revenue $ Variable costs Contribution margin $ Fixed costs Operating income $ 2,451,000 1,591,000 860,000 293,000 567,000 The CEO of Antin Art Co., Thomas Ward, would like to increase the company's profitability in 2018 by at least 35%. To accomplish this, he has asked several managers within the company to suggest a plan for 2018. The following four plans are being considered: 1. The production manager's plan is to eliminate some of the company's variable labor and replace it with machinery. This would result in a 17% decrease in variable costs per unit and a 14% increase in fixed costs. Sales volume would not change. 2. The marketing manager's plan is to launch an aggressive new advertising campaign, which would cost $90,000. This is expected to increase sales volume by 15%. 3. The product design manager's plan is to use a more expensive pigment in the production of the paint sets. Pigment is a key material used in manufacturing paint. This plan would increase the variable costs per unit by $10 and the selling price per unit by $13; however, this is also expected to reduce customer demand by 11%. 4. The facilities manager's plan is to add another manufacturing facility (currently the company only has one plant). Under this plan, Antin would double its fixed costs but would also increase its sales volume by 60%. Antin can only pursue one of these plans in 2018. Thomas Ward prefers the product design manager's plan, but before making the final decision, he has asked for input from the CFO, Angela Toris. Assume you are a staff accountant who works for Angela Toris and she has assigned this project to you. You are required to do the following: Part 1: Provide a detailed analysis of each of the four plans being considered by Antin for adoption in 2018. Your analysis should clearly show what the company's profitability is expected to be under each plan. This analysis should be handwritten and all of your work should be shown. Part 2: Prepare a memo to your boss, Angela Toris, that summarizes your analysis of these plans. Your memo should clearly indicate which of the plans you think would be the best choice for Antin to adopt in 2018 and how you came to that conclusion. In addition, your memo should discuss Thomas Ward's preferred plan. This memo should be typed and follow the proper format. Please refer to the writing resources content area on Blackboard for useful files on writing and formatting a memo.

Answer 1

The above table clearly indicate that the option 1 – production manager advice are providing higher profit than other alternative.

The production manager's plan is to eliminate some of the company's variable labour and replace it with machinery. This would result in a 17% decrease in variable costs per unit i.e. variable cost from $37 to come down $30.71 savings of $6.29 per unit. Even the fixed cost are increased but the profit is on higher side.

Thomas Ward prefers the product design manager's plan, but this would help to increase the profit only to the extent of $20,210. The product design manager's plan is to use a more expensive pigment in the production of the paint sets. Pigment is a key material used in manufacturing paint. This plan would increase the variable costs per unit by $10 and the selling price per unit by $13; however, this is also expected to reduce customer demand by 11%. Due to this the volume of sale is reduced from 43,000 unit to 38,270 unit i.e. decrease in volume would adverse impact in profitability and contribution margin. However the quality of goods would be improved.

If Thomas would not preferred to option 1 i.e. production manager advise than he can opt the advice of Facilities manager that would help in increase the sales volume results in product market share. Increase the profit by $2,23,000. Expensation of existing capacity would help in near future and better profitability.

The marketing manager advise also better than product design advise because even after expending in advertisement $90,000, the profit margin is better than product design. Therefore it is advised to CFO to reconsider the product design proposal as other beneficial option are available.

anyfurther doubt please comment.