Question

The Stackpole Company retails two products, a standard and deluxe version of a luggage carrier.

The standard carrier sells for $28, has variable costs of $18, and direct fixed costs of $1,000,000. The deluxe model sells for $50, has variable costs of $30, and direct fixed costs of $1,000,000. The company has common fixed costs of $250,000. The anticipated sales mix for the company is 3:1 or 75/25. The actual level of sales units currently is 250,000 and your target income is $250,000. You expect sales to rise 10% in the coming year.

Directions:

You have been hired to build a CVP model to help the company understand the impact of business conditions on operating income. Your model should include breakeven in units with a pro forma income statement, units sales for a target income of $250,000 with a pro forma income statement, an income statement reflecting actual current sales, margin of safety in dollars and %, and degree of operating leverage. Your model should have the capability of computing B/E, target income, MOS, DOL, and predicting change in income based on a change in sales. Create a dashboard to show these variables.

Once you have built the model, use the model to determine changes to the dashboard variables. In a report to me, your CEO, show the original variables, the changed variables and explain why the change occurred.

1. Sales mix changes to 25/75
2. Common fixed costs increase by $100,000
3. Reduce VC of the standard carrier to $10 per unit

Answer 1

Answer:

Current Positon

Particulars	Standard	Deluxe
No.of units	187500	62500

#	P.U	Total	P.U.	Total	Grand Total
Sale	28	52,50,000	50	3125000	83,75,000
Variable cost	18	33,75,000	30	1875000	52,50,000
Contribution	10	18,75,000	20	1250000	31,25,000
Fixed cost		10,00,000		10,00,000	20,00,000
Common fixed cost					2,50,000
Profit		8,75,000		2,50,000	8,75,000

After Restructuring

Particulars	Standard	Deluxe
No.of units	68750	206250

#	P.U.	Total	P.U	Total	Grand Total
Sales	28	19,25,000	50	10312500	-
Variable cost	10	6,87,500	30	6187500	-
Contribution	18	12,37,500	20	4125000	53,62,500
Fixed cost		10,00,000		10,00,000	20,00,000
Common fixed cost					3,50,000
Profit		2,37,500		31,25,000	30,12,500

Increase in units	25000	-	-	-	-
Target income	250000	-	-	-	-
	Standard		Deluxe		P.U.
Units	18750		6250	25000	-
Contribution	187500		125000	312500	12.5
Additional fixed cost				100000	-
Profit				212500	-
BEP in units	800	-	-	-	-
Margin of safety	212500	-	-	-	-
MOS in percentage	68.00%	-	-	-	-

Degree of operating Leverage

Change in sales / Change in cost (38,62,500) / (17,25,000) = 2.24