Case # 03: Cost Volume Profit ACCT 201B

ACCT 201B
Case # 03:
Cost Volume Profit
ACCT 201B
Managerial
Accounting
Fall
2014
Course
Instructor:
Randy Hoffman
•Completed Case is Due
Thurs, 10/14 Parts 1 & 2
•Interim submission due
Tues, 10/07 Part 1 a - e
CSUF: Fall 2014
CASE # 03: 50 points
Sydney Manufacturing
Cost Volume Profit
Instructor: Hoffman
PART 1
Sydney Manufacturing is a new player in the highly competitive luxury widget market.
After 3% cash discounts for early payment and 7% volume discounts extended to
national retailers the average revenue realized per widget is $200. Sydney
Manufacturing incurs annual fixed costs of $250,000 and variable costs of $160 per unit.
Required (remember to show your calculations or no credit will be given):
The following requirements are interdependent. For example, the $50,000 desired
profit introduced in Requirement c also applies to subsequent requirements. Likewise,
the $180 sales price introduced in Requirement D applies to the subsequent
requirements.
a. Determine the contribution margin per unit.
b. Determine the break-even point in units and in dollars. Confirm your answer by
preparing an income statement using the contribution margin format.
c. Suppose that Sydney Mfg. desires to earn a $50,000 profit. Determine the sales
volume in units and dollars required to earn the desired profit. Confirm your answer
by preparing an income statement using the contribution margin format.
d. If the sales price drops to $180 per unit, what level of sales is required to earn the
desired profit? Express your answer in units and dollars. Confirm your answer by
preparing an income statement using the contribution margin format.
e. If fixed costs drop to $200,000, what level of sales is required to earn the desired
profit? Express your answer in units and dollars. Confirm your answer by preparing
an income statement using the contribution margin format
f.
If variable costs drop to $130 per unit, what level of sales is required to earn the
desired profit? Express your answer in units and dollars. Confirm your answer by
preparing an income statement using the contribution margin format.
g. Assume that Sydney Mfg concludes that it can sell 5,000 units of product for $180
each. Recall that variable costs are $130 each and fixed costs are $200,000.
Compute the margin of safety in units and dollars and as a percentage.
h. Draw a break-even graph using the cost and price assumptions described in
Requirement g. Label the parts of the B-E chart
i. Using the income statement in requirement g above what is the company’s operating
leverage.
Note: Interim Due Date Oct 07 via email to TA at the end of class. Part 1 a‐e Completed case due 10/14 beginning of class. CSUF: Fall 2014
CASE # 03: 50 points
Sydney Manufacturing
Cost Volume Profit
Instructor: Hoffman
j. Given the information in requirement i what is Sydney’s net income if sales are
expected to grow 15%. Confirm your answer by preparing an income statement
using the contribution margin format.
k. Using the income statement in requirement j what is the margin of safety.
PART 2: Sydney Mfg would like to enter the low end widget market in order to access
the outlet malls where they currently don’t have any distribution. Because they don’t
want their name to be associated with cheap widgets they have decided to buy a
company already serving the market. Below is the data for two companies in the low
end market: Widgets-R-Us and Econo- Widget. Both companies will sell 50,000
widgets this year. Sales and cost data are:
Sales
Widgets-R-Us
Econo-Widgets
$
$
Variable costs
Contribution margin
560,000
$
Fixed costs
Net Income
800,000
240,000
100,000
$
100,000
$
140,000
800,000
700,000
560,000
$
140,000
Required (remember to show your calculations or no credit will be given):
1. Compute the break-even point in unit and dollar sales for each company. (Round
the answers to the next whole number.)
2. Compute the degree of operating leverage for each company.
3. Assume that each company expects sales to decline to 33,000 units next year with
no change in the unit sales price. Prepare an income statement for both companies
using the contribution margin format.
4. Assume that each company expects sales to increase to 64,000 units next year
with no change in the unit sales prices. Prepare an income statement for both
companies using the contribution margin format
5. What is the primary difference between the two companies and how does it impact
their performance.
6. Which company should Sydney Mfg buy and why?
Note: Interim Due Date Oct 07 via email to TA at the end of class. Part 1 a‐e Completed case due 10/14 beginning of class.