ohnson Manufacturing Company Peter Johnson and Lily Brown own Johnson Manufactur
ID: 2585912 • Letter: O
Question
ohnson Manufacturing Company Peter Johnson and Lily Brown own Johnson Manufacturing Company (Johnson). Johnson produced storage sheds in three primary models (A, B and C). The industry was dominated by Coleman, Phoenix, and Meco, which made several of types of sheds. Johnson was a small player in the industry with a solid customer base and a profitable business over last few years. This year was a little different - their profit was significantly lower than the prior years. The company's 2017 financials are provided in Exhibit 1 The company produces 3 products - let's call them Shed A, B and C for simplicity. The standard costs for these three products are provided in Exhibit 2. The Selling, general, and administrative (SG&A;), other costs, interest income, and interest expense are likely to remain the same no matter which product-line combinations the company produced The company is thinking about the future and has provided a preliminary proforma 2018 sales budget in Exhibit 3 Favorable preliminary 2018 forecasts lead management to believe there will be excess cash flow in 2018. Management has requested that a consultant be hired to provide an analysis of several proposed 2018 investments. The details of the proposed investments are provided in Exhibit 4 The company hires your services as their consultant. They believe that they can improve their bottom-line (net profits) by changing the product mix pricing and advertising decisions. Given that the plant currently runs at full capacity, examine the following independent scenarios 1. Calculate the current contribution margins of cach product. 2. What is the effect of discontinuing Shed A? 3. Calculate the net change in profits if the company focuses more on selling Shed C instead of Shed A. Such an action would result in a decrease of 10,000 unit sales of Shed A and an increase of 10,000 un sales of Shed C. 4. What is the effect if Shed C is decreased by $5 and the volume of Shed C increases by 10%? 5. Prepare a purchases and cash receipts budget for September, October, and November using the 2018 sales budget provided in Exhibit 3 6. Rank the proposed investments in Exhibit 4 using the net present value criteria and the accounting rate of return on initial investment. Assume the organization's cost of capital is 12%, which investment would you recommend?Explanation / Answer
1
Shed A
Shed B
Shed C
Sales price
157.50
115.50
84.00
LESS:
Direct cost
Materials
17.00
10.00
7.00
Labour
21.00
16.00
4.00
Indirect cost
(directly related to volume)
Supplies
7.00
2.00
1.00
Labor
5.00
4.00
2.00
Energy
6.00
3.00
2.00
Contribution
101.50
80.50
68.00
2
Discontinuation of Shed A will result into loss of $101.50 per unit of A.
Here it would result in loss of 101.50 * 75000 = $7,612,500
3
Each unit of Shed C gives contribution of $68.00 whereas each unit of Shed A
gives contribution of $101.50. Discontinuation of A and shifting units to C will
result in loss of 68.00 - 101.50 = $33.50 per unit.
Now, company wants to close production of A and shift capacity to
production of Shed C.
Total loss
No. of units
10000
Difference
33.50
Loss
335000
4
Effect if sales price of Shed C decreases by $5 and volume increases by 10%
Shed C
Shed C
Sales price
84.00
83.95
(84 - 5%)
LESS:
Direct cost
Materials
7.00
7.00
Labour
4.00
4.00
Indirect cost
(directly related to volume)
Supplies
1.00
1.00
Labor
2.00
2.00
Energy
2.00
2.00
Contribution
68.00
67.95
Units
205000
225500
(205000 + 10%)
Contribution
13940000
15322725
Thus, Contribution and net profit increases by (15322725 -
13940000) = $1382725 owing to decrease in sales price by 5%
but increase in volume by 10%.
1
Shed A
Shed B
Shed C
Sales price
157.50
115.50
84.00
LESS:
Direct cost
Materials
17.00
10.00
7.00
Labour
21.00
16.00
4.00
Indirect cost
(directly related to volume)
Supplies
7.00
2.00
1.00
Labor
5.00
4.00
2.00
Energy
6.00
3.00
2.00
Contribution
101.50
80.50
68.00
2
Discontinuation of Shed A will result into loss of $101.50 per unit of A.
Here it would result in loss of 101.50 * 75000 = $7,612,500
3
Each unit of Shed C gives contribution of $68.00 whereas each unit of Shed A
gives contribution of $101.50. Discontinuation of A and shifting units to C will
result in loss of 68.00 - 101.50 = $33.50 per unit.
Now, company wants to close production of A and shift capacity to
production of Shed C.
Total loss
No. of units
10000
Difference
33.50
Loss
335000
4
Effect if sales price of Shed C decreases by $5 and volume increases by 10%
Shed C
Shed C
Sales price
84.00
83.95
(84 - 5%)
LESS:
Direct cost
Materials
7.00
7.00
Labour
4.00
4.00
Indirect cost
(directly related to volume)
Supplies
1.00
1.00
Labor
2.00
2.00
Energy
2.00
2.00
Contribution
68.00
67.95
Units
205000
225500
(205000 + 10%)
Contribution
13940000
15322725
Thus, Contribution and net profit increases by (15322725 -
13940000) = $1382725 owing to decrease in sales price by 5%
but increase in volume by 10%.
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