Question

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

Using the information on page 1, answer the following questions. Include all costs (manufacturing costs and selling and administrative costs) in your calculations.

1. Prepare a CVP Income Statement for 2018 using the current production and sales volume (300,000 rattles) and the 2018 cost data, assuming no changes to selling price or costs. Child’s Play Company CVP Income Statement For the Year Ended December 31, 2018 Total Per Unit

Answer 1

SOLUTION =

CHILD'S PLAY COMPANY

COST VOLUME PROFIT (CVP) ANALYSIS FOR THE YEAR ENDED DECEMBER 31,2018

TOTAL PER UNIT(RATTLE)

SALES (300,000 UNITS ) A $2,400,000 $8

LESS : VARIABLE COST B $1,365,000 $4.55

CONTRIBUTION MARGIN A-B(C ) $1,035,000 $3.45

LESS: FIXED EXPENSES D $990,000

NET INCOME C-D $ 45,000

CONTRIBUTION MARGIN RATIO = CONTRIBUTION MARGIN /SALES =1035000/2400000=43.125%

VARIBALE EXPENSES RATIO = TOTAL VARIABLE COST /SALES = 1365000/24,00,000=56.875%

BREAK EVEN POINT = TOTAL FIXED COST / CM PER UNIT= 990,000/3.45=286,957 UNITS

1) CALCULATION OF VARIABLE COST PER UNIT = DIRECT MATERIAL COST PER UNIT + DIRECT LABOUR COST PER UNIT+ PACKAGING COST PER UNIT + VARIABLE MANUFACTURING OVERHEAD PER UNIT+ SALES COMMSSION PER UNIT+ VARIABLE SHIPPING COST PER UNIT =0.80+0.5+0.75+1.20+0.8+ 0.5 = $4.55 PER UNIT

2) CALCULATION OF FIXED COST = FIXED MANUFACTURING OVERHEAD + FIXED ADVERTISEMENT & PROMOTION EXPENSES+FIXED SELLING COST = $540,000+$180,000+270,000= $ 990,000.

3) DIRECT MATERIAL COST FOR 20 UNITS = $ 10

HENCE FOR 1 UNIT = 10/20 = $0.5 PER UNIT

MARGIN OF SAFETY = ACTUAL REVENUE - BREAK EVEN REVENUE

= 2,400,000- 2,295,656

= $104,344