In: Accounting
PARAMETERS FOR BASELINE CASE
The following numbers are estimates for the upcoming year for a
manufacturing...
PARAMETERS FOR BASELINE CASE |
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The following numbers are estimates for the upcoming year for a
manufacturing company. |
Since the
company is effective at implementing a JIT inventory system, assume
there is |
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no beginning or ending inventory. |
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No. of
units sold |
36,000 |
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Selling
price per unit |
$243.00 |
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Fixed Expenses |
Variable
Expenses (per unit
sold |
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Production costs: |
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Direct
materials |
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$18.23 |
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Direct
labor |
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36.45 |
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Factory
overhead |
$2,187,000 |
24.30 |
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Marketing
expenses: |
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Sales
salaries and commissions |
546,750 |
7.60 |
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Advertising |
364,500 |
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Miscellaneous mktg. expenses |
109,350 |
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Administration expenses: |
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Office
salaries |
729,000 |
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Supplies |
106,313 |
1.50 |
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Miscellaneous admin. expenses |
72,900 |
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TOTAL EXPENSES |
$4,115,813 |
$88.08 |
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1. Make CVP Calculations for the Baseline Case
- Prepare a contribution margin income statement (also
called a variable-costing income statement) for the manufacturing
company for the upcoming year. Examples of contribution
income statements are on page 79, Exhibit 3-1 of the Datar and
Rajan textbook and in the Chapter 3 (Datar and Rajan) course notes.
Create this statement below the baseline case parameters in the
Excel file you download. Key in proper headings.
Check figure: Operating profit
(operating income) of $1,461,307.
- Compute the company’s contribution margin per unit and
contribution margin percentage for the upcoming year. The
contribution margin percentage is calculated as contribution margin
per unit / selling price per unit or as total contribution margin /
total revenue. Make these calculations below your income statement.
Clearly label these calculations.
- Calculate the company’s breakeven point in
units for the upcoming year. Make this calculation below
your contribution margin calculations. Use Excel’s “round” function
to round up to the nearest whole number. To do this, move your
curser to the cell beside the decimal number and key in the
following formula: =ROUNDUP(cell reference,0). The
italicized cell reference means you need to key in the cell where
the decimal number is located (e.g., F12). The number 0 means zero
decimal places. Clearly label this calculation.
- Calculate the company’s breakeven point in sales
dollars for the upcoming year. Make this calculation below
your breakeven calculation in units and use the company’s
contribution margin percentage to make this calculation.
Clearly label this calculation.
. 2. Complete Four Scenarios (What-if Analyses)
You want to determine whether the
following four suggestions (i.e., e, f, g, h) would improve the
company’s performance. Determine the effects of each
suggestion on operating income, contribution margin per unit,
contribution margin percentage, breakeven point in units, and
breakeven point in sales dollars. Calculate the effects of
each suggestion independently of the other suggestions. In other
words, use the original baseline case data and make the first
change (e); use the original baseline case data and make the second
change (f); and so on. However, do not overwrite the original
baseline case.
- Put all personnel on commission. This action would affect the
sales salaries and commissions expense by eliminating the fixed
portion and by increasing the variable portion by $8.10 per unit.
Sales would increase by 4,500 units.
- Redesign the package for the product. This would decrease the
variable direct materials cost by $0.45 per unit but would increase
the fixed factory overhead by $157,500.
- Launch a new advertising campaign. This would increase fixed
advertising expense by $450,000 but would increase sales volume by
4,300 units.
- Reduce the selling price of the product by $16.20 per unit.
This would increase sales volume by 3,500 units.
- Write a memo, explaining why each suggestion
should or should not be accepted. Create your memo in Word,
not Excel. Use proper memo format. Word has a memo
template (FILE | NEW | type in ‘memo’ in the ‘search for online
templates’ box).