In: Accounting
Lily Corporation, Inc. produces high quality luggage. The company’s has two products –Standard Carrier and Deluxe Carrier. Selected information on the carriers is given below:
Standard Carrier |
Deluxe Carrier |
|
Selling Price per carrier |
$180.00 |
$250.00 |
Variable expenses per carrier: |
||
Production |
$105.00 |
$135.00 |
Commission (10% of selling price) |
$18.00 |
$25.00 |
The company has the following fixed costs:
Per Month |
|
Fixed production costs |
$150,000 |
Advertising expense |
130,000 |
Administrative salaries |
80,000 |
Total: |
360,000 |
Sales, in units, over the past two months have been as follows:
Standard Carrier |
Deluxe Carrier |
Total |
|
November(units sold) |
8,000 |
4,000 |
12,000 |
December (units sold) |
4,000 |
8,000 |
12,000 |
Required:
1. Prepare contribution income statements for November and December. Use Exhibit 5-4 on page 211 as an example.
2. Compute the company’s break-even point (BEP) in dollar sales for November and December.
3. To meet customer demand the company decides to use a higher quality material for the Deluxe Carrier starting in the month of January. This decision drives the production cost to $190 per unit. Prepare a contribution income statement for January assuming that the activity matches the activity level in December:
Standard Carrier |
Deluxe Carrier |
Total |
|
January (units sold) |
4,000 |
8,000 |
12,000 |
4. Compute the company’s break-even point in dollar sales for January.
5. Assume that in addition to the cost structure change, the Sales Department is requesting a switch from commission compensation to salary compensation. This will eliminate the Commission variable cost but will create additional fixed cost of $300,000. Prepare a contribution income statement and compute the break-even point in dollar sales for the new cost structure (use the data given in instructions 3 & 5).
6. The CFO of the company assigns you to research the following two issues:
To analyze the impact on the break-even point in instructions 3 and 5. Do you support the decision made? Why or why not.
Perform an analysis on the current and proposed sales compensation structure. What strategies can be implemented in the sales commission structure to result in increased profits for the company?
Write an official memo to the president of the company to disclose your findings and possible recommendations.