B&L Landscapes, Inc. Mini Practice Part 4 Bill Graham and Larry Miller incorpora
ID: 2468565 • 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:
1. What is the product’s contribution margin? What is the product’s CM ratio?
2. 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).
3. What is the margin of safety in dollars and units for Crestline Pipe?
4. 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?
5. 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?
6. 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
1) Contribution margin per unit = selling price per unit - variable cost per unit = $3 - $1.05 = $1.95
Total contribution margin = $ 39000
CM ratio = contribution per unit / selling price per unit = $1.95 / $3 = 0.65
2)
Break even point in units
= fixed cost / contribution per unit
= $27000 / $1.95 per unit
= 13846 units
Break even point in dollars = Fixed cost / contribution margin ratio = $27000 / 0.65 = $41538
3) Margin of safety in units = units sold - BEP units = $60000 / $3 per unit - 13846 units = 20000 units - 13846 units = 6154 units
Margin of safety in dollars = sales - BEP sales = $60000 - $41538 = $18462
4)
As there is no change in fixed cost,
increase in net operating income = increase in contribution = increase in sales x CM ratio = $20000 x 0.65 = $13000
5)
Increase in contribution = Increase in sales x CM ratio = ($60000 x 1.25) x 0.65 = $48750
To maintain the same operating income of $12000,
Fixed cost could be increased by $48750
6)
Present sales = 20000 units
Reduced selling price = $2.70
Revised contribution per unit = $2.70 - $1.05 = $1.65
Revised CM ratio = $1.65 / $2.70 = 0.61
Revised fixed cost = $27000 + $3000 = $30000
Revised BEP in units = Fixed cost / contribution per unit = $30000 / $1.65 per unit = 18182 units
Revised BEP in dollar value = Fixed cost / contribution margin ratio = $30000 / 0.6111 = $49090
Number of units to be sold to maintain a profit of $12000
= (fixed cost + target profit) / contribution per unit
= $(30000 + 12000) / $1.65 per unit = 25455 units
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