blowing safety co pl manufactures safety

Question

Blowing Safety Co. P/L manufactures safety parachutes for the airline industry. These are sold directly to the airline companies. Management expects to manufacture and sell around 90,000 parachutes for 2010; the selling price for each parachute to be $425.00 each. The direct material cost per parachute is $145.00.

The company estimates, based on historical data that there will be around 1150 orders for the year from their 95 customers and will involve producing 240 batches of parachutes.

The company introduced Activity-based costing in 2008 and the following activities and costs have been identified.

ACTIVITY	LEVEL OF ACTIVITY	ESTIMATED COSTS
Production-related costs
Production design	Product	$35,000
Production design	Batch	$110.00 per batch
Moving materials to cutting area	Batch	$85.00 per batch
Cutting machines set-up	Batch	$140.00 per batch
Moving materials to sewing area	Batch	$90.00 per batch
Sewing machines set-up	Batch	$110.00 per batch
Cutting pattern	Unit	$25.00 per unit
Stitching	Unit	$60.00 per unit
Waterproofing	Unit	$45.00 per unit
Inspection	Unit	$18.00 per unit
Packaging	Unit	$9.00 per unit
Sales-related costs
Processing customer order	Order	$55.00 per order
Distribution	Order	$275.00 per order
Sales calls	Customer	$460.00 per order
Handling customer complaints	Customer	$115.00 per order
Advertising	Market	$40,000
Other Operational costs
Administration	Company	$295,000

Assignment requirements.

1. Develop a spreadsheet and calculate the estimated profit for 2010.
2. Calculate the number of parachutes the company would need to sell in order to break even.
3. How many parachutes would the company need to sell in order to achieve a pre-tax profit of $1,000,000 (to the nearest full parachute)
4. What is the company's Margin of Safety based on estimated sales of 90,000? What does this mean to management?
5. The Marketing Manager feels that by lowering the selling price to $400 and by dropping Advertising costs to $35,000, they will be able to sell around 100,000. Advise the marketing manager what the financial outcomes would be if this was to be implemented. Do you feel that it is appropriate, explaining your reasons.