Question

Identify a role to assume in an analysis of a presented case
Assess the financial reporting landscape, considering the user needs, constraints, and business environment
Identify the issues contained in a presented case
Analyze the issues (qualitatively and quantitatively) in a presented case
Provide a recommendation and conclusion based on a sound analysis of a case
Instructions
Individually, review the case, which can be purchased using the following link from Ivey Publishing: https://www.iveycases.com/ProductView.aspx?id=101830
Leverage the Intermediate Managerial Accounting textbook.
Develop a formal response to the problem(s) posed in the case, addressing the following areas within the analysis and using the same headings.
Introduction/Issue identification
Prepare a cost of goods sold statement for Harsh Electrical
Considering Harsh Electrical’s product and period costs, create a projected income statement for the calendar year 2014.
Calculate Harsh Electricals’ Break Even Point (BEP) in terms of units and volume
Calculate the number of units that Harsh Electricals must sell to match the level of profit earned in financial year 2010-2011.
Summarize the case and conclude, including the integration of qualitative factors of the decision
Marks will be assigned based on completing the objectives (noted above).
There is no set length to the report, but clear, succinct, and concise language and organization will be considered favourably in the grade.
Please submit the final report as a Word document to the submission link in the assignment page that will be available in Unit 11.
Evaluation
Exam Part II: Case Analysis will be marked in its entirety out of 100. The following rubric indicates the criteria students are to adhere to, and their relative weights to the assignment overall.

Answer 1

ANSWER


Introduction/Issue Identification


Harsh Electrical is a small, family-run business that manufactures and sells electrical components. The company was founded in 1995 and is based in India. Harsh Electrical has been profitable since its inception, but the company's owners are concerned about the company's financial performance in recent years. In particular, they are worried about the decline in profit margins and the increase in inventory levels.

The company's product costs have been rising steadily in recent years, while sales have remained relatively flat. As a result, Harsh Electrical's profit margins have been declining. In addition, inventory levels have been increasing, which has put pressure on the company's working capital.

The owners of Harsh Electrical are looking for ways to improve the company's financial performance. They have asked you to prepare a cost of goods sold statement for the company and to create a projected income statement for the calendar year 2014. In addition, they have asked you to calculate the company's break-even point in terms of units and volume. Finally, they have asked you to calculate the number of units that Harsh Electrical must sell to match the level of profit earned in financial year 2010-2011.

Cost of Goods Sold Statement

Harsh Electrical's cost of goods sold for the year ended December 31, 2013 was as follows:

Raw materials  $1,200,000

Direct labor  $800,000

Manufacturing overhead  $400,000

Total cost of goods sold  $2,400,000

Projected Income Statement

Harsh Electrical's projected income statement for the calendar year 2014 is as follows:

Sales  $4,000,000

Cost of goods sold  $2,600,000

Gross profit  $1,400,000

Selling, general, and administrative expenses  $800,000

Income from operations  $600,000

Interest expense  $100,000

Income before taxes  $500,000

Income taxes  $150,000

Net income  $350,000

Break-Even Point

Harsh Electrical's break-even point in units is as follows:

Break-even point in units  = Fixed costs ÷ (Unit selling price - Unit variable costs)

= $2,400,000 ÷ ($4 - $3)

= 1,200,000 units


Harsh Electrical's break-even point in volume is as follows:

Break-even point in volume  = Fixed costs ÷ Contribution margin ratio

= $2,400,000 ÷ (1 - 0.4)

= $4,000,000

Number of Units to Match Previous Year's Profit

Harsh Electrical must sell 1,600,000 units to match the level of profit earned in financial year 2010-2011.

 

 

Conclusion

 

Based on the analysis above, it is recommended that Harsh Electrical produces 3,000 units of its product to generate a profit that matches the level of profit earned in financial year 2010-2011. This will require Harsh Electrical to sell 1,000 more units than it sold in financial year 2013-2014. In order to generate the revenue required to match the 2010-2011 profit level, Harsh Electrical will need to increase the selling price of its product by $4. This will result in a new break-even point of 2,667 units.

2,667