(a) You have just begun your summer internship at Valencia Manufacturing. To expand sales, the business is considering paying a commission to its sales team. You have been asked to compute 1)the new break-even sales figure, and 2) the operating profit if sales increase by 10% under the new sales commission plan. She is confident that you can handle the task, because you learned CVP analysis in your accounting class. You collected your data, performed your analysis and submitted a memo to your manager, who was very pleased with the work done. Your report indicated that the new sales commission plan would result in a significant increase in operating income but only a small increase in break-even sales. A few days after, you realized that you made an error in the CVP analysis, as the sales personnel’s $88,000 monthly salaries were inadvertently left out and you therefore did not include this fixed marketing cost in your computations. You are not sure what to do, as you are afraid that Valencia might not offer you permanent employment after the internship. How would your error affect breakeven sales and operating income under the proposed sales commission plan? After considering all factors, should you inform your manager or simply keep quiet?
Valencia Manufacturing Company manufactures and sells musical gadgets. The business earned Operating Income of $220,000 in 2018, when selling price per unit was $200, and the president of Valencia is under pressure to increase operating income in 2019. Data for variable cost per unit and total fixed costs were as follows:
|
Variable Expenses per unit :direct material |
$40 |
| direct labour | $32 |
| variable manufacturing overhead | $18 |
| Fixed Expenses: Fixed Manufacturing Overhead | $190,000 |
| Fixed Selling Cost | $115,000 |
| Fixed Administrative Costs | $135,000 |
Required:
(a) You have just begun your summer internship at Valencia Manufacturing. To expand sales, the
business is considering paying a commission to its sales team. You have been asked to compute 1)the new break-even sales figure, and 2) the operating profit if sales increase by 10% under the new sales commission plan. She is confident that you can handle the task, because you learned CVP analysis in your accounting class.
You collected your data, performed your analysis and submitted a memo to your manager, who was very pleased with the work done. Your report indicated that the new sales commission plan would result in a significant increase in operating income but only a small increase in break-even sales.
A few days after, you realized that you made an error in the CVP analysis, as the sales personnel’s $88,000 monthly salaries were inadvertently left out and you therefore did not include this fixed marketing cost in your computations. You are not sure what to do, as you are afraid that Valencia
might not offer you permanent employment after the internship.
How would your error affect breakeven sales and operating income under the proposed sales commission plan? After considering all factors, should you inform your manager or simply keep quiet?
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