Introduction: Having the ability to effectively communicate is one of the most important skills a business executive can possess. As French businesswoman and author Mirelle Guilliano has said, "Intelligence, knowledge or experience are important and might get you a job, but strong communication skills are what will get you promoted." My own business experience supports this statement. By the time individuals have a few years of experience, they have great technical skills and can assemble, analyze, and categorize data to make solid business decisions. In the end, however, they are often unable to communicate the results of their analysis effectively. When I speak to senior executives and inquire about educational needs, the conversation invariably turns to communications. In accounting, by necessity, we focus on accounting issues, but it is important to remember that as accountants we must be able to present the results of our analysis or studies to management. The best way to get better at anything is to practice. That's the basis for this assignment - to practice written communication.
Situation for Analysis: Grayslake Novelty produces and sells a small novelty item sold through tourist shops in Chicago and other northern Illinois locations. Last year the company sold 198,400 units. The income statement for Grayslake Novelty for last year is shown below:
|
Sales
|
$992,000
|
|
Less: Variable Expenses
|
545,600
|
|
Contribution Margin
|
446,400
|
|
Less: Fixed Costs
|
180,000
|
|
Net Operating Income
|
$266,400
|
While the company has been profitable, as shown in the above income statement, sales have fallen over the last few months. There is concern that new competitors are beginning to take market share from Grayslake Novelty. As a result, Sarah Burroughs, the company president, has asked you to provide some information to assist her in making some decisions.
Required:
a. While the company is currently profitable, the president wants to know the breakeven in both units and dollars at this level of sales. Additionally, compute the margin of safety and margin of safety ratio based on last year's sales.
b. One of the possible strategies (Alt 1) is to reduce the current price by 8%. What is the new break-even in units and dollars based on the price reduction?
c. A second strategy (Alt 2) is to reduce the current variable cost by 0.20 per unit. What is the new break-even in units and dollars based on the variable cost reduction of 0.20 per unit?
d. A third strategy (Alt3) is to decrease the current price by 8% and reduce the variable cost per unit by 0.20. What is the new break-even in units and dollars based on making both changes?
e. A final strategy (Alt 4) under consideration is to invest in more automated equipment for the manufacturing process. This investment will reduce variable costs by 0.65 per unit, primarily reducing the direct labor. At the same time, this will increase the fixed costs by $50,000. What is the break-even in units and dollars based on this change in operating structure?
Submission Instructions:
Write a business memo (format is in the second document of this assignment) to the president recommending the best course of action based on your analysis. In your memo, discuss changes in break-even points, and impacts to the operating leverage. Including a table summarizing your findings would be appropriate. Assume that the long-range plan is for sales to increase to 250,000 units in the next two to three years. If you recommend a change in operating structure (Alt 4), be sure to include comments on any changes in risk with your recommendation.