Managerial Accounting Case Assignment 1 Cost-Volume-Profit Analysis Point value:
ID: 2451623 • Letter: M
Question
Managerial Accounting
Case Assignment 1
Cost-Volume-Profit Analysis
Point value: 100 points
Due date: October 19th, 2015
Requirements:
Answer the questions at the end of the case assignment.
Provide all supporting calculations.
Summarize the results of your analysis for requirement six in a one-page report.
This report must be typed.
Note: You may not work with other students on this case. The submitted work must be your own work. To ensure successful completion of the course it is essential that you submit the case assignment by its due date.
Round two decimal points where rounding is necessary.
Eco Luggage 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.
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
Explanation / Answer
Eco Luggage Corporation Inc 1. Contribution Income Statements November December Standard Deluxe Total Standard Deluxe Total Sales 1440000 1000000 2440000 720000 2000000 2720000 Less: Variable Cost Production 840000 540000 1380000 420000 1080000 1500000 Sales 144000 100000 244000 72000 200000 272000 984000 640000 1624000 492000 1280000 1772000 Contribution 456000 360000 816000 228000 720000 948000 Less: Fixed Costs Production 150000 150000 Advertising 130000 130000 Administrative Salaries 80000 80000 Total Fixed Costs 360000 360000 Net Profit 456000 588000 2. Break Even Point in $ Sales Contribution/Sales Ratio 0.334426 0.348529 Break Even Sales (Fixed Costs/Cont Margin Ratio) 1076471 1032911 3. Contribution Income Statement January Standard Deluxe Total Sales 720000 2000000 2720000 Less: Variable Cost Production 420000 1520000 1940000 Sales 72000 200000 272000 492000 1720000 2212000 Contribution 228000 280000 508000 Less: Fixed Costs Production 150000 Advertising 130000 Administrative Salaries 80000 Total Fixed Costs 360000 Net Profit 148000 4. Break Even Point in $ Sales Contribution/Sales Ratio 0.186765 Break Even Sales (Fixed Costs/Cont Margin Ratio) 1927559 5. Contribution Income Statement (after proposed change in cost structure) Standard Deluxe Total Sales 720000 2000000 2720000 97640.93 2817641 Less: Variable Cost Production 420000 1520000 1940000 420000 1520000 1940000 Contribution 300000 480000 780000 Less: Fixed Costs Production 150000 Advertising 130000 Administrative Salaries 80000 Addl Fixed Cost 300000 Total Fixed Costs 660000 Net Profit 120000 Contribution/Sales Ratio 0.286765 808000 Break Even Sales (Fixed Costs/Cont Margin Ratio) 2301538 373979 6. Official Memo to the CEO The increase in Material cost of the Deluxe carier to the extent of $55/Unit has increased the BEP by 86% (comparing the figures for December and January). The use of the high quality material has not increased the price of the Deluxe Carrier or increased its sale, with the result that the increase in material cost has only resulted in loss of contribution and consequently profit to that extent. This change in quality of the material used for Deluxe has to be reviewed. It should be continued only if its reversal would reduce the sales of the model. The sales commission used to be 10% of the sales value, which is proposed to be changed to fixed salaries. This will have the effect of increasing the fixed costs and reducing the variable cost. This move can be beneficial to the company only if it is able to sell additional quantity to cover the increased fixed cost. The Break Even Point would also be pushed further up. The additional quantity to be sold should be at least 3.6% of the existing quantity so that the same BEP is maintained. If there is no prospect for increasing the quantiy of sales, it would be better to continue with the existing system of of variable compensation for sales personnel.
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