1. Differential costs: Special order. Assume Road-Runner Shoes has a plant capacity that can produce 3.000 units per week (each unit is a pair of shoes). Its predicted operations for the week follow:
Sales (2,000 units at $40 each)..................................................80,000
Manufacturing Costs
Fixed cost ....................... $10,000
Variable cost......................... $15 per unit
Marketing and administrative cost
Variable (all sales commission)..........................$ 3 per unit
Fixed................... $15,000
Should Road-Runner accept a special order for 400 units at a selling price of S30each? Assume these units are subject to half the usual sales commission rate per unit, and assume no effect on regular sales at regular prices. How will the decision affect the Company's operating profit?
2. Customer profitability analysis. Squeaky Clean, a commercial laundry service, has two clients, Super 6 Motel and Seaside Inn. The following is information about Squeaky's revenues and costs (in thousands) by customer for the previous year:
Super 6 Motel Seaside Inn Total Revenue (fees charged) $230 $350 $580 Operation cost
Cost of service (variable) $212 $305 $517
Salaries rent and general administration (fixed 20 35 55
Total operating cost 232 340 572
Operating profits 2 10 8
The Analysis apparently shows that Super 6 Motel is not profitable for Squeaky. Use Differential analysis to decide whether Squeaky should discontinue the Super 6 Motel Account.
3. CVP analysis and financial modeling (adapted from CMA exam). Brow_kowski is a retailer for high-tech recording disks. The projected operating profit for the current year is $200,000 based on a sales volume of 200,000 units. The company has been selling the disks for $16 each; variable costs consist of the $10 purchase price and a handling cost. The company's annual fixed costs are $600,000.
Management is planning for the coming year, when it expects that the unit purchase price of the disks will increase by 30 percent.
a. Calculate the company's break-even point for the current year in units.
b. What will be the company's operating profit for the current year if there is a 20 percent increase in projected unit sales volume?
c. What volume of dollar sales must be achieved in the coming year to maintain the current year's operating profit if the selling price remains at $16?
About the use of a financial model be helpful to the firm in addressing issues such as those raised in requirements b. and c.? Explain.
4. Make or buy: OI salt enterprise produces 1000 sail boats per year. Although the company currently buys sails for the sailboats (one set of sails per boat), it is considering making sails in some space that it does not currently use. The company purchases each set of sails for $300. It could make the sails for variable costs of $250 per set, plus it would allocate $200,000 of fixed costs per year to the sail-making operation. However, this $200,000 is not a differential cost of making sails; it is part of the costs the company already incurs that it would allocate away from sailboat manufacture to sail making.
a. Prepare a differential analysis to show whether 01' Salt Enterprises should make of buy the sails. What should you recommend to management'? Explain why the $200,000 fixed costs allocated to sail making is or is not relevant to the decision.
b. If Or Salt buys the sails, then it would have unused factory space. Suppose 01 Salt received an opportunity to rent out this unused factory space for $80,000 per year. Would that affect your recommendation in part a.?
5. Additional Problem - Mountain Bagels
Mountain Bagels bakes and sells authentic New York style kettle-boiled bagels. For the most recent year, Mountain Bagels sold 250,000 bagels at a selling price of $1 per bagel. During this same year, Mountain Bagels incurred fixed costs of $100,000 and variable costs of $0.40 per bagel.
Management of Mountain Bagels is considering extending their product line to include bagel sandwiches. Management estimates that adding bagel sandwiches would increase their total fixed costs by $25,000 per year and that the variable cost per bagel sandwich would be $1.80.
REQUIRED:
a. Ignoring the new product line, how does Mountain Bagels' profit increase or decrease with the number of bagels sold? What was Mountain Bagels' profit for the most recent year?
b. How would adding bagel sandwiches change Mountain Bagels' profit? What information would you need before you can determine how introducing bagel sandwiches would affect Mountain Bagels' overall profit? Is it reasonable to assume Mountain Bagels will still sell 250,000 bagels?
c. Assume Mountain Bagels believes that, in addition to selling 250,000 bagels in the coming year, it can sell 25,000 bagel sandwiches. What price should Mountain Bagels charge per bagel sandwich if it wishes to increase overall profit by $50,000?
d. Assume Mountain Bagels believes that it can sell 25,000 bagel sandwiches at $4.50 but that this will reduce the number of bagels sold by 25,000 to 225,000 (i.e., there is a one-for-one tradeoff between bagels and bagel sandwiches). Assuming this sales mix remains constant, what is the break even point in sales dollars and units for each product?