Problem A:
Salmon Inc. sold 21,000 units of its only product and incurred a $85,000 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2017's activities, the productions manager notes that variable costs can be reduced 50% by installing a machine that automates several operations, To obtain these savings, the company must increase its annual fixed costs by $150,000. The maximum output capacity of the company is 40,000 units per year.
Required:
1 Compute the break-even point in dollar sales for year 2016.
2 Compute the predicted break-even point in dollar sales for year 2017 assuming the machine is installed and no change occurs in the unit selling price. (Round all numbers to the nearest dollar.)
3 Prepare a forecasted contribution margin income statement for 2017 that shows the expected results with the machine installed. Assume that the unit selling price and the number of units sold will not change, and no income taxes will be due.
4 Compute the sales level required in both dollars and units to earn $500,000 of target pretax income in 2017 with the machine installed and no change in unit sales price. (Round all numbers to the nearest dollar and to whole units.)
5 Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume no income taxes will be due.
Problem B:
Block Ltd makes BLOCKS. Their pre-tax income and their margin of safety have both been low compared to the levels the company would like to achieve. Consequently, they asked their employees to do some research and come up with suggestions that would result in increases of both pre-tax income and their margin of safety over the next year. The current pricing structure consists of the following data points:
Three employee teams have come up with different plans to improve pre-tax income and the margin of safety for next year. Respond to Required Items #1, 2, & 3 for the Current Year and for each of the Three Scenarios suggested by the employee teams. Answer Required Item #4 for each of the Three Scenarios and then make the decision requested in Required Item #5.
Required:
1. Compute the Break-Even point in both units and sales dollars for the Current Data and each of the Three Scenarios.
2. Provide a Contribution Margin Income Statement for the Current Data and each of the Three Scenarios.
3. Provide the Margin of Safety calculation for the Current Data and each of the Three Scenarios.
4. Briefly, list two pros and two cons that you consider important when comparing the results of implementing each of the Three Scenarios.
5. Choose the Scenario that you would recommend to the company and briefly explain why it is the best choice.
Scenario 1--Check Figure: CM% = 59.62%
Research indicates that the company can purchase a different material, of equal quality, to construct the blocks. This would reduce material costs by 20%.
Using the new material would also result in a 15% reduction in direct labor costs.
All other data points remain constant.
Scenario 2--Check Figure: BE in Units = 26,768
Research indicates that the company can purchase a different material, of equal quality, to construct the blocks. This would reduce material costs by 20%.
Using the new material would also result in a 15% reduction in direct labor costs.
Market research indicates that the company could increase the selling price by 10%, but that doing so would result in a 10% decrease in units sold.
All other data points remain constant.
Scenario 3--Check Figure: Pre-tax Income = $284,483
Negotiations with suppliers resulted in an agreement that would decrease the cost of the new material mentioned in Scenarios 1 and 2 by an additional 20% if the company purchased it in bulk.
To use up the material purchased in the amounts required to get the discount, the company would need to increase sales unit volume by 50%. Market research indicates that this is possible as long as the selling price is decreased by 20%.
Market research also indicates that improved packaging would be needed to achieve the needed sales volume levels. The packaging costs would increase by 25%.
Direct labor costs would remain the same as they were in Scenarios 1 and 2.
Attachment:- Accounting Assignment.rar