Question

1. Capstone, Inc. (Chapter 7)

The VP for Sales and Marketing, Morgan Lusk, is trying to plan for the coming year in terms of production needs to meet the sales demand. She is also trying to determine ways in which the company’s profits might be increased in the coming year.

Instructions

1. Capstone, Inc. markets a simple water control and timer that it mass-produces. During 2019, the company sold 650,000 units at an average selling price of per solution $10.00 per unit. The variable expenses were $1,825,000, and the fixed expenses were $797,500.
   1. What is the product’s contribution margin ratio? (Round to nearest whole percentage)
   2. What is the company’s break-even point in units and in dollars for this product?
   3. What is the margin of safety, both in dollars and as a ratio? (Round to nearest whole percentage)
   4. If management wanted to increase its income from this product by 10%, how many additional units would have to be sold to reach this income level?
   5. If sales increase by 35,000 units and the cost behaviors do not change, how much will income increase on this product?

2. Capstone, Inc. is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.50 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.35 per unit. Capstone, Inc. currently sells 525,000 sprinkler units at an average selling price of $35.00. The manufacturing costs are $6,850,000 variable and $2,050,140 fixed. Selling and administrative costs are $2,651,657 variable and $885,000 fixed.
   1. If Capstone, Inc. begins mass-producing its special-order sprinklers, how would this affect the company?
   2. If the average sales price per sprinkler unit did not increase when the company began mass-producing the special-order sprinkler, what would be the effect on the company?

Answer 1

a.	Sales (units)	650000
	Avg SP $ (per unit)	10
	Variable Expenses ($)	1825000
	Fixed Expenses ($)	797500
	Sales	= 650000* 10	6500000
	Less: Variable Expenses		-1825000
	Contribution		4675000
-	Contribution Margin Ratio	= (4675000 / 6500000)*100	71.92307692	72%
-	Break even points (units) = Fixed Costs / Contribution	= 797500 / (10 - 1825000/650000)	110882.35	110883 units
		110917.9416
	Break even points (dollars)= Fixed Costs / Contribution margin ratio	= 797500 / 0.719231	$ 1108823.17363962	$ 1108823
-	Margin of Safety ratio (%) = ((Current Sales Level - breakeven point)/ Current level of sales) * 100	= ((650000*10 - 1108823)/ (650000*10))*100	82.94118462	83%
	Margin of Safety ratio (Dollars) = (Current Sales - breakeven sales	= (650000*10 - 1108823)	$ 5391177
-	If management wants to increase its income by 10%
	Current Contribution	4675000
	Less: Fixed Costs	-797500
	Income	3877500	387750
	Increased income	4265250
	Contribution be X	X
	Less: Fixed Cost	-797500
	Increased Income	4265250
	X - 797500 = 4265250	X = 5062750
		Contribution per unit = 4675000/650000 = 7.19 per unit
	No of units to be sold for increased profit = 5062750/7.19	= 703912 units
-	If Sales increases by 35000 units
	New sales unit = 650000+35000 = 695000 units
		New	Old
	Sales (695000*10), (650000*10)	6950000	6500000
	Less: Variable Cost (1825000/650000)*695000	-1951346	-1825000
	Contribution	4998654	4675000
	Less: Fixed Cost	-797500	-797500
	Income	4201154	3877500
	Income Increase = New - Old	$ 323654
a.	If Capstone begins mass-producing
	Selling price per unit = 35 + 0.35 = $ 35.35
	Variable Manufacturing Cost + Variable Selling and administrative cost (per unit)= (6850000 +2651657)/525000 + 0.50	$ 18.60
	Current
	Sales		18375000
	Less: variable cost
	- Manufacturing cost	6850000
	- Selling and administrative cost	2651657	-9501657
	Contribution		8873343
	Less: Fixed Cost
	- Manufacturing cost	2050140
	- Selling and administrative cost	885000	-2935140
	Income		5938203
	When mass producing
	Sales		20414625
	Less: variable cost		-10741500
	Contribution		9673125
	Less: Fixed Cost
	- Manufacturing cost	2050140
	- Selling and administrative cost	885000	-2935140
	Income		6737985
	When mass producing but avg sales price does not increases
	Sales		20212500
	Less: variable cost		-10741500
	Contribution		9471000
	Less: Fixed Cost
	- Manufacturing cost	2050140
	- Selling and administrative cost	885000	-2935140
	Income		6535860
	When company starts mass production and its sales price also increases then Income of co. increases by $ 799782 (6737985 - 5938203) and when its selling price does not increases with mass production then increase income is $ 597657 (6535860 - 5938203)