This year Best Company earned a disappointing 5.6% after-tax return on sales (net income/sales) from marketing 100,000 units of its only product. The company buys its product in bulk and repackages it for resale at the price of $20 per unit. Best incurred the following costs this year. Total variable unit costs . . . . . . . . . . . . . . . . . . . . . $800,000 Total variable packaging costs . . . . . . . . . . . . . . . $100,000 Fixed costs . . . . . . . . . . . . . . . . . . . . . . . $950,000 Income tax rate . . . . . . . . . . . . . . . . . . . 25% The marketing manager claims that next year’s results will be the same as this year’s unless some changes are made. The manager predicts the company can increase the number of units sold by 80% if it reduces the selling price by 20% and upgrades the packaging. This change would increase variable packaging costs by 20%. Increased sales would allow the company to take advantage of a 25% quantity purchase discount on the cost of the bulk product. Neither the packaging change nor the volume discount would affect fixed costs, which provide an annual output capacity of 200,000 units. Required 1. Compute the break-even point in dollar sales under the (a) existing business strategy and (b) new strategy that alters both unit selling price and variable costs. (Round answers to the next whole dollar.) 2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of (a) the existing strategy and (b) changing to the new strategy. The statements should report sales, total variable costs (unit and packaging), contribution margin, fixed costs, income before taxes, income taxes, and net income. Also determine the after-tax return on sales for these two strategies.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
This year Best Company earned a disappointing 5.6% after-tax return on sales (net income/sales) from
marketing 100,000 units of its only product. The company buys its product in bulk and repackages it for
resale at the price of $20 per unit. Best incurred the following costs this year. Total variable unit costs . . . . . . . . . . . . . . . . . . . . . $800,000
Total variable packaging costs . . . . . . . . . . . . . . . $100,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . $950,000
Income tax rate . . . . . . . . . . . . . . . . . . . 25%
The marketing manager claims that next year’s results will be the same as this year’s unless some changes
are made. The manager predicts the company can increase the number of units sold by 80% if it reduces
the selling price by 20% and upgrades the packaging. This change would increase variable packaging
costs by 20%. Increased sales would allow the company to take advantage of a 25% quantity purchase
discount on the cost of the bulk product. Neither the packaging change nor the volume discount would
affect fixed costs, which provide an annual output capacity of 200,000 units.
Required
1. Compute the break-even point in dollar sales under the (a) existing business strategy and (b) new strategy
that alters both unit selling price and variable costs. (Round answers to the next whole dollar.)
2. Prepare a
expected results of (a) the existing strategy and (b) changing to the new strategy. The statements
should report sales, total variable costs (unit and packaging), contribution margin, fixed costs,
income before taxes, income taxes, and net income. Also determine the after-tax return on sales
for these two strategies.
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