Question

In: Accounting

Child’s Play Company makes a plastic rattle for toddlers. The rattle is generally marketed through exclusive...

Child’s Play Company makes a plastic rattle for toddlers. The rattle is generally marketed through exclusive retailers located in upscale shopping malls. In late 2018, Diana Suarez, the president of the company, was considering an alternative marketing plan for 2019 that was presented to her by Bill Duffy, the marketing manager. Based on sales from January through September 2018, Diana expected that 2019 sales would amount to 300,000 units. Bill’s alternative marketing plan is presented below: 2019 Marketing Plan: “At the present time, we sell the product to retailers for $8.00 per rattle. Retailers generally charge the consumers between $9 and $9.50. If we cut our selling price to retailers to $7.50, I expect that the product will do much better. Their increased markup will give them the incentive to display our product more prominently and to promote it more vigorously to customers. We should support this strategy by supplying more promotional materials to retailers, which I expect would be an increase of $4,600 in Advertising and Promotion costs. Based on the price cut and the increase in advertising and promotion, I expect that we will be able to boost our sales volume by 20 percent to 360,000 units in 2019.” Diana received cost data from the company’s CFO, Don Capp. Don expects that the cost data below are also reliable estimates for 2019 for a production volume up to 400,000 units. Beyond 400,000 units, the company would have to rent additional machines (with a capacity of 100,000 units each), which would increase fixed manufacturing overhead costs by $50,000 per machine. 2018 Cost Data Manufacturing Costs for rattles (based on production volume of 300,000 units): Direct Materials $0.80 per unit Direct Labor $10 per hour (each worker can make 20 units in 1 hour) Packaging $0.75 per unit Variable Manufacturing Overhead $1.20 per unit Fixed Manufacturing Overhead $540,000 Selling and Administrative Costs for rattles (based on sales volume of 300,000 units): Sales Commissions $0.80 per unit Shipping Costs $0.50 per unit Advertising and Promotion (fixed) $180,000 Fixed Selling and Admin Expenses $270,000 4. Assuming the selling price and cost changes in the Marketing Plan are adopted, prepare a CVP Income Statement for 2019, assuming sales and production increase by 20% as outlined in the Marketing Plan.

Solutions

Expert Solution

CVP income statement for the year 2019 as per the new marketing plan

Particulars

amount

$

sales revenue

[360,000 units * $ 7.50]

2,700,000

less: variable manufacturing cost

[360,000 units * $ 3.25 ( refer working note 1)]

1,170,000

less: variable selling and administrative overheads

[360,000 units * 1.30 $ ( refer working note 2)]

468,000
contribution margin 1,062,000
less: fixed manufacturing overheads 540,000
less: advertising and promotion cost 180,000
less: additional advertising and promotion cost (as per new marketting plan) 4,600
less: fixed selling and administrative expenses 270,000
Net profit 67,400

* as per the new marketting plan the selling price is reduced to $ 7.50 and the production and selling are increased to 360,000 units which the 20 % increase as per the new marketting plan , it also incurs an additional advertising and promotion cost of $ 4,600

** as the production does not cross 400,000 units there is no addition in the fixed manufacturing overheads , it remains the same as previous year

working note 1 calculation of variable manufacturing cost per unit

particulars

amount per unit

$

direct materials 0.80

direct labor

1 hour for 20 units , so for per unit 1hour / 20 units = 0.05 hours

per unit cost of labor = 0.05 * $10 per hour = $ 0.50

0.50
packing cost 0.75
variable manufacturing overheads 1.20
total variable manufacturing cost 3.25

* the cost estimates of the year 2018 are reliable upto the production of 400,000 units therefore there is no change from the previous year per unit values.

working note 2 calculation of variable selling and administrative cost per unit

particulars

amount per unit

$

sales commission 0.80

shipping cost

0.50
total variable selling and administrative cost 1.30

* the cost estimates of the year 2018 are reliable upto the production of 400,000 units therefore there is no change from the previous year per unit values.


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