Robin Simmons is ready to complete a cost-volume-profit analysis for 2016 for th
ID: 2419018 • Letter: R
Question
Robin Simmons is ready to complete a cost-volume-profit analysis for 2016 for the Stellar Packaging Products manufacturing plant to determine if the break-even point is achieved, given the expected decline in volume. Specific costs for production of 500,000 units include the following:
Stellar Packaging Products
Variable Costs Total
Fixed Costs Total
Raw materials
%bodyamp;nbsp; 400,000
Direct manufacturing labor
%bodyamp;nbsp; 200,000
Indirect manufacturing labor
%bodyamp;nbsp; 105,000
Factory Insurance & Utilities
%bodyamp;nbsp; 63,000
Depreciation -- Machinery and factory
%bodyamp;nbsp; 38,500
Repairs and maintenance -- factory
%bodyamp;nbsp; 28,000
Selling, marketing and distribution expenses
%bodyamp;nbsp; 40,000
%bodyamp;nbsp; 80,000
General and administrative expenses
%bodyamp;nbsp; 120,000
There are no beginning or ending inventories. The total sales for 500,000 units produced are $2,000,000.
Instructions:
Answer the following questions given the fact pattern above, showing all calculations.
What is the contribution margin per unit for each chocolate bar produced, given the fact pattern above?
What is the Stellar Packaging’s U.S. division break-even point in units and dollars, given the fact pattern above?
What is the Stellar Packaging’s U.S. division margin of safety and degree of operating leverage, given the fact pattern above?
Write a brief explanation (approximately two paragraphs) that Simmons might deliver to management to inform them of the analytical outcome, given the projected revenue and cost. Does the company have to implement a cost-reduction strategy in order to break even?
Stellar Packaging Products
Variable Costs Total
Fixed Costs Total
Raw materials
%bodyamp;nbsp; 400,000
Direct manufacturing labor
%bodyamp;nbsp; 200,000
Indirect manufacturing labor
%bodyamp;nbsp; 105,000
Factory Insurance & Utilities
%bodyamp;nbsp; 63,000
Depreciation -- Machinery and factory
%bodyamp;nbsp; 38,500
Repairs and maintenance -- factory
%bodyamp;nbsp; 28,000
Selling, marketing and distribution expenses
%bodyamp;nbsp; 40,000
%bodyamp;nbsp; 80,000
General and administrative expenses
%bodyamp;nbsp; 120,000
Explanation / Answer
SALES 2000000 VARIABLE COST 640000 CONTRIBUTION MARGIN 1360000 contribution per unit 2.72 Fixed cost 396000 Indirect manufacturing expenses 105000 factory insurance 63000 depreciation 38500 repairs 28000 selling and marketing expenses 80000 general and administrative expenses 120000 EBIT 964000 Contribution margin contribution/sales 0.32 contribution margin per unit 2.72 Break even point in unit fixed cost/contribution per unit 145588.2 break even point in value fixed cost/ contribution margin 1237500 Margin of safety actal sales - break even point 762500 Degree of Operating leverage contribution/ EBIT 1.410788 Company is operating at a good position have a high level of sales above the break even point. Company operating leverage is 1.41 which is quite low. Yes company mayadopt a policy of cost reduction to further improve the level of profit
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