5 points for submission neatness and highlighting answers Q1 - 5 points each for
ID: 2586823 • Letter: 5
Question
5 points for submission neatness and highlighting answers
Q1 - 5 points each for calculating the contribution margin for each product - total 15 points
Please note that Q2 and Q3 - use differential analyses (think relevant and irrelevant information). Do not use irrelevant information in calculating the effect on the profit. Taking the long approach will result in deduction of points
Q2- require one number (the loss if product A is discontinued) - that number and short narrative interpreting the number calculated = 4 points
Q3 - 4 points each - loss on discontinuing and profit on adding the third product - the answer should have a short narrative as well -2 points = 10 points
Q4 - Purchase budget 8 points for each month - each month has 4 numbers and each number should be correct = total for purchase budget = 24 points
Q5 - Cash receipts budget - same as above but 7 points per month = 21 points
Q6 - 8 points NPV and 3 points for ARR - no explanation required = total 11 points
parameters:
Preview File Edit View Go Tools Window Help *) 50% L Mon Dec 4 9:04 PM Q E Version B-Final Exam(4).pdf (page 1 of 3) '-. Q, Search Search View Zoom Highlight Rotate Markup Version B-Final Ex… Johnson Manufacturing Compan 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 ing 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 each 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 unit 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? eetsExplanation / Answer
1
The Current Contribution Margins of each product
Storage Sheds
Particulars
A
B
C
Sales Units
75,000
100,000
205,000
Selling Price
$ 157.50
$ 115.50
$ 84.00
Sales
$ 11,812,500.00
$ 11,550,000.00
$ 17,220,000.00
(Sale units X Selling Price)
Selling Price per Unit (A)
$ 157.50
$ 115.50
$ 84.00
Variable Costs per Unit
Direct Costs
Materials
$ 17.00
$ 10.00
$ 7.00
Labour
$ 21.00
$ 16.00
$ 4.00
Indirect Costs
Supplies - 100% variable
$ 7.00
$ 2.00
$ 1.00
Labour - 50% variable
$ 5.00
$ 4.00
$ 2.00
(10*50%)
(8*50%)
(4*50%)
Energy - 50% variable
$ 6.00
$ 3.00
$ 2.00
(12*50%)
(6*50%)
(4*50%)
Total Variable Costs per Unit (B)
$ 56.00
$ 35.00
$ 16.00
Contribution per Unit (A-B)
$ 101.50
$ 80.50
$ 68.00
2
The Effect of Discontinuing Shed A
Particulars
Shed A
Sales (A)
$ 11,812,500
(Number of units sold X Selling price per unit)
(75000*157.5)
Cost of Goods Sold (B)
$ 9,000,000
(Number of units sold X Cost per unit)
(75000*120)
Income before Tax (A-B)*
$ 2,812,500
Income Tax @35%**
$ 984,375
(2812500*35%)
Net Income
$ 1,828,125
Due to discontinuing the Shed A there will be a loss of net income of $ 1828125
* Since the selling, general, and administrative other costs, interest income and interest expense are not affected by the discontinuing of Shed A, so the same is irrelevant here
**Income Tax Rate
35.00%
(Income tax/Taxable Income)
(2699375/7712500*100)
3
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 10000 units sales of Shed A and increase of 10000 units of sales of Shed C
storage sheds
Particulars
A
B
C
Total
Sales
$ 10,237,500
$ 11,550,000
$ 18,060,000
$ 39,847,500
(Number of units sold X Selling price per unit)
(65000*157.5)
(100000*115.5)
(215000*84)
Less: Cost of Goods Sold
$ 7,800,000
$ 6,000,000
$ 6,450,000
$ 20,250,000
(Number of units sold X Cost per unit)
(65000*120)
(100000*60)
(215000*30)
Gross Margin
$ 2,437,500
$ 5,550,000
$ 11,610,000
$ 19,597,500
SG&A
$ 9,350,000
Other Costs
$ 2,100,000
Operating Income
$ 8,147,500
Less: Interest Expense
$ 420,000
Plus: Interest Income
$ 150,000
Income before Tax
$ 7,877,500
Income Tax @35%
$ 2,757,125
(7877500*35%)
Net Income (Revised)
$ 5,120,375.00
Net Income (Original)
$ 5,013,125.00
Increase in Net Income
$ 107,250.00
4
What is the effect if Shed C is decreased by $5 and Volume of Shed C increased by 10%
Particulars
Shed C (original)
Shed C (Revised)
Sales (A) *
$ 17,220,000
$ 17,814,500
(Number of units sold X Selling price per unit)
(205000*84)
(225500*79)
Cost of Goods Sold (B)
$ 6,150,000
$ 6,765,000
(Number of units sold X Cost per unit)
(205000*30)
(225500*30)
Income before Tax (A-B)
$ 11,070,000
$ 11,049,500
Income Tax @35%***
$ 3,874,500
$ 3,867,325
(11070000*35%)
(11049500*35%)
Net Income
$ 7,195,500
$ 7,182,175
Decrease in Net Income due to revision of Selling Price is
$ 13,325
* Revised Selling Price (84-5)
$ 79.00
* Revised Sales Volume (205000*110%)
225500
** Since the selling, general, and administrative other costs, interest income and interest expense are not effected by the discontinuing of Shed A, so the same is irrelevant here
***Income Tax Rate
35.00%
(Income tax/Taxable Income)
(2699375/7712500*100)
1
The Current Contribution Margins of each product
Storage Sheds
Particulars
A
B
C
Sales Units
75,000
100,000
205,000
Selling Price
$ 157.50
$ 115.50
$ 84.00
Sales
$ 11,812,500.00
$ 11,550,000.00
$ 17,220,000.00
(Sale units X Selling Price)
Selling Price per Unit (A)
$ 157.50
$ 115.50
$ 84.00
Variable Costs per Unit
Direct Costs
Materials
$ 17.00
$ 10.00
$ 7.00
Labour
$ 21.00
$ 16.00
$ 4.00
Indirect Costs
Supplies - 100% variable
$ 7.00
$ 2.00
$ 1.00
Labour - 50% variable
$ 5.00
$ 4.00
$ 2.00
(10*50%)
(8*50%)
(4*50%)
Energy - 50% variable
$ 6.00
$ 3.00
$ 2.00
(12*50%)
(6*50%)
(4*50%)
Total Variable Costs per Unit (B)
$ 56.00
$ 35.00
$ 16.00
Contribution per Unit (A-B)
$ 101.50
$ 80.50
$ 68.00
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