Question

Cupid Company sells boxes of chocolates. They currently offer two different types, heart shaped and cupid shaped. They sell 8,750 cupid shaped boxes for $18.75 and 10,000 heart shaped boxes for $15.00 each. Cupid Company has $18,000 of fixed costs (non-plant). Both boxes currently have an extremely manual manufacturing process. The cupid shaped box costs $7.50 each to make, comprised of $1.50 in variable overhead, $2.10 in direct materials, direct labor cost $8.15 per hour and it takes employees 28.72 minutes per box. The heart shaped box costs $6.00 each to make, comprised of $1.50 in variable overhead, $1.58 in direct materials, $8.15 per hour for direct labor; it takes employees 21.5 minutes per box.

One of the employees, Venus, proposed a cost savings plan. Her plan was to purchase a new chocolate picking machine, which would cut direct labor by 40%. The machine costs $785,000 and would last the company 6 years with a $20,000 salvage value. They would be able to sell the machine at the end of six years for $35,000.

Venus was discussing her plan with a co-worker, Aphrodite. Aphrodite believed that sales were currently constrained by available space and labor. She believed that in addition to reducing labor costs, Cupid Company would also be able to increase sales of each style by 5%. Additionally, she proposed a new product be offered; chocolate flower bouquets. The company would be able to see 3,200 units at $30 each. The cost would be $10.50 per bouquet, comprised of $1.50 in variable overhead, $7.00 in direct materials, $8.15 per hour for direct labor and it takes employees 14.73 minutes per bouquet. Additionally, fixed costs would increase by $5,000.

Cupid Company's desired rate of return is 15%, has a 30% tax rate and they use straight-line depreciation for all plant assets. All numbers provided are pre-tax.

For each scenario detailed above (current scenario, Venus' proposal and Aphrodite's proposal), create an Income Statement for each year of the project. Create three separate income statments on excel please

Answer 1

Current
		Cupid	Heart	Total
Direct material		2.10	1.58
Direct labor *		3.90	2.92
Variable overhead		1.50	1.50
Total Variable cost (A+B+C)		7.50	6.00
Unit selling price		18.75	15.00
Contribution per unit (E-D)		11.25	9.00
Sale units		8750	10000
Total Contribution		98428	90000	188428
Fixed Expenses				18000
Net operating profit				170428
Income taxes @ 30%				51128
Net income				119299
Working:
Direct labor (mins.)	A	28.72	21.5
Direct labor rate per hour	B	8.15	8.15
Direct labor cost per unit *	C	3.90	2.92
( A x B / 60)

Venus
		Cupid	Heart	Total
Direct material		2.10	1.58
Direct labor *		1.40	1.75
Variable overhead		1.50	1.50
Total Variable cost (A+B+C)		5.00	4.83
Unit selling price		18.75	15.00
Contribution per unit (E-D)		13.75	10.17
Sale units		8750	10000
Total Contribution		120274	101678	221951
Fixed Expenses **				28625
Net operating profit				193326
Income taxes @ 30%				57998
Net income				135329
Working:
		Cupid	Heart
Present Direct labor (mins.)	A	17.2	21.5
Savings in direct labor	B	40%	40%
Revised direct labor (hrs) (A - (A x B))	C	10.34	12.90
Direct labor rate per hour	D	8.15	8.15
Revised direct labor cost per unit *	E	1.40	1.75
( C X D / 60)
		Total
Cost of machinery	A	785000
Salvage Value	B	20000
Depreciable Value (A - B)	C	765000
Estimated life - years	D	6
Annual Depreciation	E	127500
Depreciation per month	F	10625
Current fixed expenses	F	18000
Revised fixed expenses **	G	28625

Aphrodite
		Cupid	Heart	Flower Bouquets	Total
Direct material		2.10	1.58	7.00
Direct labor *		1.40	1.75	2.00
Variable overhead		1.50	1.50	1.50
Total Variable cost (A+B+C)		5.00	4.83	10.50
Unit selling price		18.75	15.00	30.00
Contribution per unit (E-D)		13.75	10.17	19.50
Revsed sale units **		8750	10000	3200
Total Contribution		120274	101678	62397	284349
Revised Fixed Expenses ***					33625
Net operating profit					250724
Income taxes @ 30%					75217
Net income					175507
Working:
		Cupid	Heart	Flower Bouquets
Present Direct labor (mins.)	A	17.2	21.5
Savings in direct labor	B	40%	40%
Revised direct labor (hrs) (A - (A x B))	C	10.34	12.90	14.73
Direct labor rate per hour	D	8.15	8.15	8.15
Direct labor cost per unit *	E	1.40	1.75	2.00
( C X D / 60)
Current Sales -- units		8750	10000
Increase in sales		5%	5%
Revised Sales **		9188	10500	3200
Fixed expenses as per Venus' plan		28625
Addition to fixed expenses		5000
Revised Fixed Expenses ***		33625