Problem - Quality Watches Company (QWC) manufactures different brands of a hand watch in Bangkok, Thailand. The company's accountant, Tony Blake, has just received the sales forecast for the coming year for QWC's three watch products: QW-Orient, QW-Fossil, and QW-Citizen. QWC has experienced considerable discrepancy in sales volumes and variable costs over the past two years, and Bernard believes that the forecast should be cautiously assessed from a cost-volume-profit perspective. The initial budget data for the year 2017 is as follows.
QW-Orient
QW-Fossil
QW-Citizen
Total Sales units 5,000 5,000 10,000 20,000
Total Sales Revenue
$400,000
$500,000
$2,000,000
$2,900,000 Total variable manufacturing costs $150,000 $200,000 $600,000 $950,000
Total variable selling & Admin. costs
$60,000
$80,000
$200,000
$340,000 Total fixed Manufacturing OH costs $240,000
Total fixed Selling & Admin. costs
$170,550
Quality Watches Company pays tax at the rate of 30 per cent. The projected sales volume of 20,000 is estimated to represent 20% of market share in the watch-makers industry in Thailand for the year 2017.
Required: (treat each requirement independently; show all computations)
1. Determine QWC's budgeted net profit for the year 2017. (Hint: use contribution margin approach to income statement or variable costing statement). 3 Marks
2. Assuming the sales mix remains as planned, determine how many units of each watch QWC must sell in order to breakeven in the year 2017. 3.5 Marks
3. Calculate the projected safety margin in units for the year 2017. 1.5 Marks
4. After preparing the original estimates and proceeding as per plan for the first quarter, the watch industry in Thailand suddenly started to experience a boom that affects some of the original estimates. As a result, management determined that the variable manufacturing costs of QW-Citizen would increase by 10 per cent, and the variable selling & administration cost of QW-Fossil could be expected to increase by $4.00 per unit. Total fixed manufacturing overhead cost is also expected to increase by $2,550. However, management have decided to keep the same selling price for each type of watch. In addition, management have learnt that watches are getting prominence and thus watch sales are expected to grow in Bangkok. Pertinent to the growth in the watch industry, QWC will experience an increase in sales units that will push its expected market share to 25%. Under these circumstances (i.e., change in cost and increase in market share), answer the following: 7 Marks
a) Compute the adjusted sales volumes of each type of watch given that the sales mix remains the same.
b) Calculate the new weighted average contribution margin.
c) Determine how many units of each watch QWC would have to sell in order to break even in the year 2017.