The following information is available for year 1 for Dancer Components: Revenue
ID: 2344341 • Letter: T
Question
The following information is available for year 1 for Dancer Components:Revenues (300,000 units).......... $5,700,000
Manufacturing Costs
Materials............................. $336,000
Variable Cash Costs.............. 284,800
Fixed Cash Costs.................. 655,200
Depreciation (fixed).............. 1,998,000
Marketing and administrative costs
Markering (variable, cash)..... 844,800
Marketing depreciation.......... 299,200
Administrative (fixed, cash)... 1,018,400
Administrative depreciation... 149,600
Total Costs.................... $5,586,000
Operating profits..................... $ 114,000
All depreciation charges are fixed and are expected to remain the same for year 2. Sales volume is expected to increase by 18 percent, but prices are expected to fall by 5 percent. Material costs per unit are expected to decrease by 8 percent. Other unit variable manufacturing costs are expected to decrease by 2 percent per unit Fixed manufacturing costs are expected to increase by 5 percent. Variable marketing costs will change with volume. Administrative cash costs are expected to increase by 10 percent. Inventories are kept at zero. Dancer operates on a cash basis.
Required:
Prepare a budgeted income statement for year 2
Explanation / Answer
Solution:
Output and pricing:
Total
Volume Price C/M Contribution
50,000 $25 9 $450,000
60,000 24 8 480,000
70,000 23 7 490,000
80,000 22 6 480,000
The C/M per unit decreases as volume increases.
Output of 70,000 at selling price of $23 yields the largest contribution margin. However, this is in excess of capacity.
Maximum at present capacity: 60,000 units output at $24
= Contribution margin of $480,000
To increase capacity:
Investment $200,000
Useful life 10 years
Cost per year ($200,000 ÷ 10) $ 20,000
By increasing capacity to 70,000 units, which is maximum C/M, the company gains an additional $10,000 in C/M but incurs an additional fixed cost of $20,000.
Conclusions: Do not invest in new capacity.
Sell at $24.
Produce 60,000, the maximum capacity now available.
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