B&L Landscapes, Inc. Mini Practice Part 4 Bill Graham and Larry Miller incorpora
ID: 2468456 • Letter: B
Question
B&L Landscapes, Inc. Mini Practice Part 4
Bill Graham and Larry Miller incorporated B&L Landscapes, Inc. on July 1, 2014. The business consists of lawn care and sprinkler system installations. In addition, they also sell two types of fertilizer.
During 2015, B&L Landscapes, Inc. acquired a 30% interest in Crestline Pipe. The president of Crestline has been expressing concern about the profitability of the company. Bill and Larry want to help and have volunteered your services to provide some managerial reporting for Crestline.
Crestline Pipe distributes high-quality ¾ inch PVC pipe that sells for $3.00 per linear foot unit. Variable costs are $1.05 per unit, and fixed costs total 27,000 per year.
Assume that the operating results for last year were:
Sales.........................................................................................................
$60,000
Less variable expenses.........................................................................
21,000
Contribution margin..............................................................................
39,000
Less fixed expenses...............................................................................
27,000
Net operating income..........................................................................
$ 12,000
Instructions:
Answer the following independent questions:
What is the product’s contribution margin? What is the product’s CM ratio?
Use the contribution margin to determine the break-even point in sales units (round to whole units). Use the CM ratio to determine the break-even point in sales dollars (round to whole dollars).
What is the margin of safety in dollars and units for Crestline Pipe?
Due to an increase in demand, the company estimates that sales will increase by $20,000 this year. By how much should net operating income increase (or net operating loss decrease), assuming that fixed costs do not change?
The president expects sales to increase by 25% this year. If sales do increase by 25%, how much could fixed costs increase and still maintain net operating income of $12,000?
The president would like to reduce the sales price of the pipe to $2.70 per linear foot unit and increase advertising by $3,000. Using the CM method, what is the breakeven point in units with these changes (round to whole units)? How many units would Crestline have to sell to maintain a net operating income of at least $12,000 (round to whole units)?
Prepare your answers in a memo to the President of Crestline Pipe. Be sure to show all your work and identify your calculations and your solutions clearly. Remember this report is going to a non-accountant, so be sure to include some explanation of what the numbers mean.
Sales.........................................................................................................
$60,000
Less variable expenses.........................................................................
21,000
Contribution margin..............................................................................
39,000
Less fixed expenses...............................................................................
27,000
Net operating income..........................................................................
$ 12,000
Explanation / Answer
To : President of Crestline Pipe Subject: Profitability of operations Mr. Crestline, I have worked out on the profitabillity of the operation based on last year figures. Ans have noticed that it is havimg profitable business. Please find below m findings. Ans 1 Contribution Margin= $39,000 Contribution Margin per unit Contribution margin/No.of sold units 39000/20000 1.95 $ No. of units sold $60000/3=20000 Contribut margin ratio 1.95/3 0.65 Ans 2 Break-even point (units) Fixed Cost/Contibution per unit =27000/1.95 13846 units Ans 3 Break-even point $ Fixed Cost/CM Ratio =27000/.65 41538 $ Ans 4 Margin of safety (units) Sales in units-Break even sales in units = 20000-13846 6154 units Margin of safety $ Current sales- Breakeven sales 60000-41538 18462 $ Ans 5 Income Statement Sales revenue 3*40000 120000 Variable cost 1.05*40000 42000 Contribution margin 78000 Fixed Costs 27000 Net income 51000 Income will increase by 51000-12000 39000 Ans 6 Income Statement Sales revenue (3*20000*125%) 75000 Variable cost (1.05*20000*125%) 26250 Contribution margin 48750 Fixed Costs 36750 Net income 12000 Fixed cost 48750-12000 36750 Fixed cost will increase by 36750-27000 9750 Ans 7 Break-even point (units) Fixed Cost/Contibution per unit =30000/(2.7-1.05) 18182 UNITS Target sales (12000+30000)/(2.7-1.05) 25455 units Please feel free to ask any queries. Regards
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.