Question

Minden Company produces plastic patio furniture. Summary data from its 2013 income statement are as follows:

Revenues

Variable costs Fixed costs Operating income

Angela Gore, Minden’s president, is
asks Jenny Hilton, production manager, and Chris Jones, controller, to see if there are ways to reduce costs.

After 2 weeks, Jenny returns with a proposal to reduce variable costs to 52% of revenues by reducing the costs Minden currently incurs for safe disposal of wasted plastic. Chris is concerned that this would expose the company to potential environmental liabilities. He tells Jenny, “We would need to estimate some of these potential environmental costs and include them in our analysis.” “You can’t do that,” Jenny replies. “We are not violating any laws. There is some possibility that we may have to incurenvironmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company and costing all of us our jobs. The only reasonour competitors are making money is because they are doing exactly what I am proposing.”

Required:

Calculate Minden Company’s breakeven revenues for 2013.

Calculate Minden Company’s breakeven revenues if variable costs are 52% of revenues.

Calculate Minden Company’s operating income for 2013 if variable costs had been 52% of revenues.

Given Jenny Hilton’s comments, what should Chris Jones do?

$4,000,000

2,400,000 1,728,000 $ (128,000)

very concerned about Minden Company’s poor profitability. She

Answer 1

Solution 1:

Current contribution = $4,000,000 - $2,400,000 = $1,600,000

Contribution margin ratio = $1,600,000 / $4,000,000 = 40%

Fixed cost = $1,728,000

Breakeven sales = Fixed cost / contribution margin ratio = $1,728,000 / 40% = $4,320,000

Solution 2:

If variable costs are 52% of revenuese then contribution margin ration = 48%

Minden company's breakeven revenues = $1,728,000 / 48% = $3,600,000

Solution 3:

Computation of Operating income - Minden's Company - 2013
Particulars	Amount
Revenues	$4,000,000.00
Variable cost (52%)	$2,080,000.00
Contribution	$1,920,000.00
Fixed cost	$1,728,000.00
Operating income	$192,000.00

Solution 4:

Chris jones should accept proposal of reduction in cost that company is incurring on safe disposal of plastic waste if same is not resulting in violation of any laws. Further this facts should be disclosed to management with potential future enviornment liability and try to convince the management for better future of organization.