Greek Manufacturing Company produces and sells a line of product that are sold usually all year round. The company has a maximum production capacity of 100,000 units per year. Operating at normal capacity, the business earned Operating Income of $600,000 in 2020. The following cost data has been prepared for the year ended December 31, 2020 Selling price per unit……………………………………… $50.00 Production Costs: Direct Materials …………………………………. $10.00 Direct Labour ……………………………………. $8.00 Variable Manufacturing Overhead ……………. $7.00 Fixed Manufacturing Overhead…………....................... $450,000 Fixed Selling & Administrative Expenses……………… $300,000 Variable selling expense per unit ………………………. $10.00 Required: d) Assuming sales equal to the normal capacity calculated in a) above, prepare a contribution margin income statement for the year ended December 31, 2020, detailing the components of total variable costs and total fixed costs, and clearly showing contribution and net income. e) The recession in the economy in 2021 is expected to result in a reduction of the number of units sold. Assuming that Greek is operating at normal capacity, by how much can sales decline in units and sales dollars in 2021 without the company making a loss? f) The President of Greek Manufacturing is under pressure from shareholders to increase operating income by 30% in 2021. Management expects per unit data and total fixed costs to remain the same in 2021. Using the equation method, compute the number of units that would have to be sold in 2021 to reach the shareholders desired profit level. Is this a realistic goal? g) Greek’s management team is concerned about the selling expenses associated with the product and wants to reduce the variable selling expense per unit by 30%, which will see a simultaneous reduction in the total fixed selling expenses by $30,000. If they are able to accomplish this feat, it is expected that sales volume for the year will fall by 16⅔% below normal capacity. What must the new selling price per unit be if the company wishes to meet the shareholders’ profit objective for 2021? How will these changes impact the percentage margin of safety?
Greek Manufacturing Company produces and sells a line of product that are sold usually all year round. The
company has a maximum production capacity of 100,000 units per year. Operating at normal capacity, the
business earned Operating Income of $600,000 in 2020. The following cost data has been prepared for the
year ended December 31, 2020
Selling price per unit……………………………………… $50.00
Production Costs:
Direct Materials …………………………………. $10.00
Direct Labour ……………………………………. $8.00
Variable Manufacturing Overhead ……………. $7.00
Fixed Manufacturing Overhead…………....................... $450,000
Fixed Selling & Administrative Expenses……………… $300,000
Variable selling expense per unit ………………………. $10.00
Required:
d) Assuming sales equal to the normal capacity calculated in a) above, prepare a contribution margin
income statement for the year ended December 31, 2020, detailing the components of total variable
costs and total fixed costs, and clearly showing contribution and net income.
e) The recession in the economy in 2021 is expected to result in a reduction of the number of units sold.
Assuming that Greek is operating at normal capacity, by how much can sales decline in units and sales
dollars in 2021 without the company making a loss?
f) The President of Greek Manufacturing is under pressure from shareholders to increase operating
income by 30% in 2021. Management expects per unit data and total fixed costs to remain the same in
2021. Using the equation method, compute the number of units that would have to be sold in 2021 to
reach the shareholders desired profit level. Is this a realistic goal?
g) Greek’s management team is concerned about the selling expenses associated with the product and
wants to reduce the variable selling expense per unit by 30%, which will see a simultaneous reduction in
the total fixed selling expenses by $30,000. If they are able to accomplish this feat, it is expected that
sales volume for the year will fall by 16⅔% below normal capacity. What must the new selling price per
unit be if the company wishes to meet the shareholders’ profit objective for 2021? How will these
changes impact the percentage margin of safety?
h) What are the advantages and disadvantages of the scattergram method as compared to the high-low
method?
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