Question

Project 1 - Cost Volume Profit Project You work in the Finance division of a large recreational vehicle company that specializes in 4-wheel utility vehicles. As reward for your excellent performance, you have been assigned as Division Accountant for a new division that will be manufacturing and selling snowmobiles. In your new position, you will have a dual reporting responsibility to both the new Snowmobile Division head as well as the Controller in the Finance Division. The Controller has requested you put together an analysis of the new product by preparing a cost-volume-profit study. The employee information you have related to the new product in the new division includes: The Division head at a salary of $130,000. The division has hired 2 marketing representatives at a salary of $55,000 apiece. The Division’s head of manufacturing has a salary of $80,000 Your salary should be included in the division’s expenses at $45,000

Information about the sales costs include

Hired 2 sales representatives at $60,000 per for base salaries. The plan is to incent the sales staff by paying a $100 commission per snow mobile sold.

The sales staff is estimating the average sales price will be $12,500 per snowmobile

Projections of manufacturing cost include

Cost of direct materials per snowmobile is $3,000

Labor time required per snowmobile is 60 hours.

Average hourly labor cost is $36 / hour

Other cost of operations information you are aware of

Lease of the office space for staff is $50,000 / year and includes utilities

Lease of manufacturing space is $80,000 / year and includes utilities

You have been asked by the Controller to do the following

1. (40 points) Estimate the number of snowmobiles that must be sold for the division to breakeven for the year?

2. (20 points) Estimate the number of snowmobiles that must be sold in order to make a profit of $300,000?

3. (20 points) An alternative is to manufacture a higher quality snowmobile that could sell for $16,000. But it requires $3,800 in direct materials and 68 hours of labor time per snowmobile. If using this alternative, how many vehicles must be sold to breakeven for the year?

4. (10 points) Using the same assumptions as 3, how many must be sold to make $300,000 profit?

5. (10 points) The Controller has also requested that you provide some ideas on how to make the division’s cost structure more variable in case the division doesn’t meet its sales projections. What advice do you have?

Answer 1

1. BEP:

Particulars	Per unit
Sales revenue	12500
Variable cost	5260
Contribution	7240

a	Contribution per unit	7,240
b	Fixed costs	6,15,000
c=b/a	BEP units	84.94

Fixed costs
Division head salary	1,30,000
Marketing rep salaries	1,10,000
Manufacturing head salary	80,000
My salary	45,000
Sales rep salaries	1,20,000
Office lease rent	50,000
manf space rent	80,000
Total fixed costs	6,15,000
Variable cost per unit:
Sales commission	100
Direct material	3,000
Direct labor	2,160
Variable cost per unit	5,260

2.

a	Fixed costs	6,15,000
b	Required profit	3,00,000
c= a+b	Required contribution	9,15,000
d	Contribution per unit	7,240
e=c/d	Required sales	126.38

3.

a	Contribution per unit	9,652
b	Fixed costs	6,15,000
c=b/a	BEP units	63.72

Particulars	Per unit
Sales revenue	16,000
Variable cost	6,348
Contribution	9,652

Variable cost per unit:
Sales commission	100
Direct material	3,800
Direct labor	2,448
Variable cost per unit	6,348

4.

a	Fixed costs	6,15,000
b	Required profit	3,00,000
c= a+b	Required contribution	9,15,000
d	Contribution per unit	9,652
e=c/d	Required sales	94.80

5. Primarily fixed costs are in the nature of salaries, they can be structured into base salary, and to some extent based on performance and profit levels of the company. by doing so employees will be motivated at the same time cost becomes more variable in nature.