Questions
Q1) Cruz manufacturing had a bad year in 2008. For the first time its history it operated at a loss. The company's income statement showed the following results from selling 80,000 units of products: Net Sales $1,600,000. Total Cost and expenses $1,740,000. And net loss $1,400,000. Costs and expenses consisted of the following.
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Total
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Variable
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Fixed
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Cost of goods sold
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$1,200,000
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$780,000
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$420,000
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Selling expenses
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420,000
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75,000
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345,000
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Administrative expenses
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120,000
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45,000
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75,000
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Total
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$1,740,000
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$900,000
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$840,000
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Management is considering the following independent alternatives for 2009
1) Increase unit selling price 20% with no change in cost and expenses
2) Change the compensation of salesperson from fixed annual salaries totaling $200,000 to total salaries of $40,000 plus a 5% commission on net sales.
3) Purchase new high tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50-50
Instructions
(a) Compute the break-even point in dollars for 2008
(b) Compute the break -even point in dollars under each of the alternative courses of action. (Round to nearest dollar.) Which course of action do you recommend?
Q2) Poole Corporation has collected the following information after its first year of sales. Net sale were $1,600,000 on 100,000 units; selling expenses $240,000 (40% variable and 60% fixed); direct materials $511,000; direct labor $285,000; administrative expenses $280,000 (20% variable and 80% fixed); manufacturing overhead $360,000 (70% variable and 30% fixed). Top management has asked you do to don a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.
Instructions
(a) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed cost for the current year. (Assume that fixed cost will remain the same in the projected year)
(b) Compute the break-even point in units and sales dollars for the first year
(c) The company has target net income of $310,000. What are the required sales in dollars for the company to meet its target?
(d) If the company meets its target net income number, by what percentage could it sales fall before it is operating at a loss? That is, what is its margin of safety ratio?
(e) The company is company is considering a purchase of equipment that would reduce its direct labor costs by $104,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed ( assume total manufacturing overhead cost is $360,000, as above). Compute (1) the contribution margin and (2) the contribution margin ration, and recomputed (3) the break-even point in sales dollars. Comment on the effect each of management's proposed changes has on the break-even point.
Q3) Pro sport Inc, manufactures basketballs for the National Basketball Association's (NBA). For the first 6 month of 2008, the company reported the following operating results while operating at 90% of plant capacity and producing 112,500 units
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Amount
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Sales
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$4,500,000
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Cost of goods sold
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3,600,000
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Selling and administrative expenses
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450,000
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Net income
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$450,000
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Fixed costs for the period were: cost of goods sold $1,080,000 and selling and administrative expenses $225,000.
In July, normally a slack manufacturing month, Pro Sports receives a special order for $ 10,000 basketballs at $ 28 each from Italian Basketball Association (IBA). Appreciate of the order would increase variable selling and administrative expenses %0.50 per unit because of shipping costs but would not increase fixed cost and expenses.
Instructions -
(a) Prepare an incremental analysis for the special order
(b) Should Pro Sports Inc. accept the special order? Explain your answer
(c) What is the minimum selling price on the special order to produce net income of $4.10 per ball?
(d) What nonfinancial factors should management consider in making its decision?
Q4) Mesa Industrial Products Co (MIPC) is a diversified industrial -cleaner processing company. The company's Verde plant produces two products: a table cleaner and floor cleaner from common set of set of chemical inputs (CDG). Each week 900,000 ounces of chemical input are produced at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 once of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name Floor Shine. The additional processing costs for this conversation amount to $250,000.
Floor shine sells at $20 per ounce bottle. The table cleaner can be sold for $25 per $30 ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $18 per ounce bottle.
The company decides not to process the table cleaner into TSR and TSP based on the following analysis.
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Process Further
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Table Cleaner
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Table Stain Remover(TSR)
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Table polish (TP)
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Total
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Production in ounces
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(300,000)
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300,000
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300,000
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Revenue
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$250,000
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$180,000
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$180,000
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$360,000
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Costs:
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CDG costs
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TCP Costs
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Total Cost
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105,000 **
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100,000
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205,000
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Weekly gross profit
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$180,000
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$77,500
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$77,500
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$155,000
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*If table cleaner is not processed further it is allocated 1/3 of the $210,000 of CDG costs, which in equal to 1/3 of the total physical output
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**If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.
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Instructions
(a) Determine if management made the correct decision to not process the table cleaner further by doing the following.
(1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.
(2) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.
(3) Compare the resulting net incomes and comment on management's decision.
(b) Using incremental analysis, determine if the table cleaner should be processed further.