Assignment
Redo COMPANY
Income Statement
For the Year Ended December 31, 2016
Sales (45,000 units at $10) $450,000
Less cost of goods sold:
Direct materials $ 90,000
Direct labor 78,300
Manufacturing overhead 98,500 266,800
Gross margin $183,200
Less operating expenses:
Selling expenses:
Variable:
Sales commissions $27,000
Shipping 5,400 32,400
Fixed (advertising, salaries) 120,000
Administrative expenses:
Variable (billing and other) 1,800
Fixed (salaries and other) 48,000 202,200
Net loss $(19,000)
All variable expenses in the company vary in terms of units sold, except for sales commissions that are based on sales dollars. Variable manufacturing overhead is 30 cents per unit. Hanson Company's plant has a capacity of 75,000 units per year.
The company has been operating at a loss for several years. Management is studying several possible courses of action to determine what should be done to make the year 2017 a profitable one.
REQUIRED:
1. Redo Hanson Company's 2016 income statement in the contribution margin format. (The Salem Company Example in your CVP Class Notes will help you with this.) Show both TOTAL dollars and PER-UNIT dollars. (However, do not show per-unit data for the fixed costs since they are not incurred on a per-unit basis.)
2. The president is considering two proposals prepared by members of her staff:
a. For next year, the vice president would like to reduce the unit selling price by 20 percent. He is certain that this would fill the plant to capacity.
b. For next year, the sales manager would like to increase the unit selling price by 20 percent, increase the sales commission to 9 percent of sales, and increase advertising by $100,000. Based on marketing studies, she is confident that this would increase unit sales by one third.
Prepare two contribution income statements, one showing what profits would be under the vice president's proposal and one showing what profits would be under the sales manager's proposal. For comparison purposes, add these new (pro forma) statements to your original contribution income statement prepared above. For each statement, include both total dollars and per-unit dollars.
3. Refer back to the original data. The president believes it would be a mistake to change the unit selling price. Instead, she wants to use less costly materials in manufacturing units of product, thereby reducing unit costs by 70 cents. How many units would have to be sold next year to earn a target profit of $30,200 (ignoring income taxes)?
4. Refer back to the original data. Hanson Company's board of directors believes that the company's problem lies in inadequate promotion. By how much can advertising be increased and still allow the company to earn a target return of 4.5 percent on sales of 60,000 units?
5. Refer back to the original data. The company has been approached by an overseas distributor who wants to purchase 9,500 units on a special price basis. There would be no sales commission on these units. However, shipping costs would be increased by 50 percent, and variable administrative costs would be reduced by 25 percent. In addition, a $5,700 special insurance fee would have to be paid by Hanson Company to protect the goods in transit. What unit price would have to be quoted on the 9,500 units by Hanson Company to allow the company to earn a profit of $14,250 on total operations? Regular business would not be disturbed by this special order.
Of the several proposals (not including item #5) that the company is considering, which one(s) do you recommend that the company pursue? Why?