Reference no: EM132582679

Answer the following five problems and submit your answers in a WORD, EXCEL, or PDF document to the D2L Drop Box. Show your work and be sure it is readable.

Question 1. The Pantovich Company is not happy with last year's operating income of only $30,000. The selling price during the year was $15 per unit. The total variable costs were $180,000 and total fixed costs were $90,000. The sales manager wants to increase the selling price next year by 15% although she knows that the number of units sold would likely be reduced by 10%.

If her proposal is adopted and her assumption about volume of sales is correct, what would the new operating income be? (HINT: Use the CM format income statement to list what you know, then solve for the unknowns you need to solve the problem.)

Question 2. Giddings Company manufactures and sells a single product, Product G. The product sells for $60 per unit and has a contribution margin ratio of 40 percent. The company's monthly fixed expenses are $28,800.

If the selling price is reduced by 5%, variable costs per unit reduced by $1.00, and fixed costs increased to a total of $40,750, how many units would need to be sold to earn operating income equal to 10% of sales revenue? (Ignore income taxes.)

Question 3. K.L. Boyd Company's total fixed costs are $130,000 per year. The company's break-even point in sales dollars is $250,000. If sales are $350,000 next year, what will operating income be? (HINT: Use your knowledge of the ‘ratios' to solve this. Ignore income taxes.)

Question 4. Operating leverage - Superior Door Company sells pre-hung doors to home builders. The doors are sold for $60 each. Variable costs are $42 per door and fixed costs total $450,000 per year. The company is currently selling 30,000 doors per year.

A. Prepare a contribution format income statement for the company at the present level of sales and compute the degree of operating leverage.
B. Management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, or 25% over current sales). Compute the expected net operating income for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)

Question 5. Point of Indifference - The William Company manufactures personal sized drip coffee makers. The coffee makers sell for $25. At present, the coffee makers are manufactured in a small plant that relies on direct labor workers. Therefore, variable costs are high, totaling $15 per machine.

Last year, the firm sold 30,000 coffee makes with the following results.

Williams Company Income Statement

            Sales                                                 $750,000

            Less Variable Costs                           450,000

            Contribution Margin                          300,000

            Less Fixed Costs                                210,000

            Operating Income                             $ 90,000

The firm is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable costs per coffee maker by 40% (that is, variable costs will decrease by 40% per unit). However, fixed costs in the new plant will double.

A. Calculate the POI for the current manufacturing process and for the new automated plant. (Hint: First calculate the per unit "P" and "V" from the information above.)
B. If unit sales next year are expected to be about the same as this year (about 30,000 units), should the firm go ahead with construction of the new plant?
C. If unit sales next year are expected to increase to 40,000 units due to expanded marketing of the unit, should the firm go ahead with construction of the new plant?