Question

McCrystal Incorporated has experienced both profitability and inventory buildup that has resulted in liquidity problems. As a result McCrystal has hired you an expert business analyst to help them. The table below is for 2019 indicative of the typical year for McCrystal. McCrystal employs an experienced management team whose compensation consists of salaries, and bonuses based on net income (GAAP based).

  

Beginning Inventory in units	200
Price	$550.00
Sold	450
Actual production	500
Budgeted production	500
Unit Variable Costs
Manufacturing	$125.00
Selling and Administrative	$75.00
Fixed Costs
Manufacturing	$100,000
Selling and Administrative	$25,000

Required:

a) Can you help McCrystal? What do you recommend? You must support your answer

Answer 1

From costing point of view, one must look at the contribution per unit earned by the company. Further, the break-even-sales will help in understanding whether minimum number of sales quantity is being achieved or not.

Let us first calculate contribution per unit.

Particulars	Amount	Amount
Sale price (A)		550
Less Variable cost (B)		200
- Manufacturing expenses	125
- Selling expenses	75
Contribution per unit ( A-B )		350

Let us calculate the break even sales -

Break even sales = Fixed cost / Contribution per unit

Break even sales = 125000/350 = 358 units

if company will sales 358 units, the company would be able to recover the fixed cost. In current scenario company is selling 450 units, it means company can easily recover the fixed cost.

Let us compute the profit earned -

Contribution per unit	350
total contribution ( 350* 450 units sold )	157500
Less: Fixed Manufacturing expenses	100000
Less: Fixed selling expenses	25000
Net profit	32500

Ultimately the company will have profit of $ 32500. The company should continue the manufacturing activity.

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