Question 2. (20 points total) The management team of Transcendental Company has
ID: 2570597 • Letter: Q
Question
Question 2. (20 points total) The management team of Transcendental Company has hired you to help them with some accounting projections. They have put together part of a cost volume profit (CVP) Income Statement for the current year. You will need to complete the statement. They also provide the following information: • They are planning to sell the same number of units of product next year • They have selling and administrative salaries and recurring costs of $75,000 per year • The leases and salaries related to production costs (COGS) are $250,000 per year • They pay selling and related shipping costs of $3 per unit
They would like you to project their situation to reflect two changes: 1) For the coming year, no changes are expected in revenues and costs, except that a new wage contract will increase variable costs in COGS by $6 per unit. 2) In response to the higher wage costs that are projected, management is considering installing automated manufacturing equipment next year. This equipment will increase annual fixed costs in COGS by $150,000 but will decrease variable manufacturing costs by $10 per unit. (This change should be combined with the higher wages in part 1 above.)
Required:
(a) (10 points) Complete the CVP Income Statement to reflect the wage changes for next year and to reflect the investment in equipment. Use the blank columns in the table below.
(b) (5 points) Determine the break-even sales (in units) for the past year and for each of the two other scenarios.
(c) (5 points) Do you think that the investment in the equipment is a good idea? Refer to the information in the statement that you have prepared. What are the pros and cons of the option of investing in additional equipment to lower variable costs in COGS? Be specific!
Contribution Margin Income Statement ." Based on units sold of: 35,000 35,000 35,000 Next Year, with Next Year, with [higher labor cost higher labor cost|and invest in Past Year as only changenew equipment S875,000 Variable costs: COGS Operating expense total variable costs Contribution Margin ..j. Fixed costs: COGS 420,000 total fixed costs erating income Break Even Point: LExplanation / Answer
Contribution Margin Income Statement
Based on units sold of:
35000
35000
35000
Past Year
Next Year with higher labor cost as only change
Next Year with higher labor cost and invest in new equipment
1 sales
$ 875,000
$ 875,000
$ 875,000
Variable costs:
2 COGS
420,000
630,000
(420 000+6*35000)
280,000
(630 000-10*35000)
3 Operating expense
105,000
(35 000*3)
105,000
105,000
4 Total variable costs (2+3)
525,000
735,000
385,000
5 Contribution Margin (1-4)
350,000
140,000
490,000
Fixed costs:
6 COGS
250,000
250,000
400,000
(250 000+ 150 000)
7 Selling & admin cost
75,000
75,000
75 000
8 Total fixed costs (6+7)
325,000
325,000
475,000
Operating income (5-8)
25,000
-185,000
15,000
Break Even Point
32,500
81,250
33,929
b. BEP= Total Fixed Cost / Contribution Margin per unit (contribution margin / total units)
Past Year = 325 000 / 10(350 000 / 35 000)
= 32 500 units
Next year with higher labor cost = 325 000/4(140 000/35 000)
= 81 250 units
Next year labor cost and automated machine = 475 000 / 14(490 000 / 35 000)
= 33 929 units approx.
C. No. It is not a good investment. Because it reduce the net income and increase the break-even point (BEP). If BEP Increase Company need to more sales make a profit. In BEP there was no any profit or loss.
Pros of investing in additional equipment
It will increase the contribution margin. Because it lower the variable cost. Company will benefit in short term.
Cons of investing in additional equipment
It will reduce the net income. It will reduce the future investment opportunities to the company. It is not benefit in long term for the company.
Based on units sold of:
35000
35000
35000
Past Year
Next Year with higher labor cost as only change
Next Year with higher labor cost and invest in new equipment
1 sales
$ 875,000
$ 875,000
$ 875,000
Variable costs:
2 COGS
420,000
630,000
(420 000+6*35000)
280,000
(630 000-10*35000)
3 Operating expense
105,000
(35 000*3)
105,000
105,000
4 Total variable costs (2+3)
525,000
735,000
385,000
5 Contribution Margin (1-4)
350,000
140,000
490,000
Fixed costs:
6 COGS
250,000
250,000
400,000
(250 000+ 150 000)
7 Selling & admin cost
75,000
75,000
75 000
8 Total fixed costs (6+7)
325,000
325,000
475,000
Operating income (5-8)
25,000
-185,000
15,000
Break Even Point
32,500
81,250
33,929
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