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.