Reference no: EM132746442
Case Study Question - Darius Manufacturing Company manufactures and sells parts for various musical gadgets. The business earned Operating Income of $420,000 in 2018, when selling price per unit was $200 and the president of Darius is under pressure to increase operating income in 2019 and is therefore considering the implementation of strategies geared at increasing revenues. Data for variable cost per unit and total fixed costs were as follows:
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Variable expenses per unit:
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Direct Material
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$20
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Direct Labour
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$50
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Variable Manufacturing Overhead
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$10
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Fixed expenses:
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Fixed Manufacturing Overhead
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$125,000
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Fixed Selling Costs
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$75,000
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Fixed Administrative Costs
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$100,000
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You have just begun your internship at the company. The financial controller, Dave Miller, has indicated that the business is considering paying a commission to its sales team as part of the sales expansion effort, which should result in an increase in sales revenue. The head of the marketing department has indicated that the effort of the sales team should result in a 15% increase in sales volume. As a junior member of the team evaluating the proposal, you have been tasked to compute 1) the new break-even sales figure, 2) the new margin of safety and 3) the new operating profit, to determine whether the new sales commission plan is indeed viable. Your manager is confident that you can handle the task, because you learned C-V-P analysis in your accounting class.
Upon examination of the information furnished by the Accounting Department, you realized that the sales unit for 2018 was not provided but you are confident that you will be able to determine this from the data set.
After completing the calculations for the various scenarios, you 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 salaries amounting to $146,400 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 the company's management might not offer you permanent employment after the internship period.
Requirements -
a) Using the equation method, calculate the number of units sold in 2018?
b) How would your error affect breakeven sales, margin of safety and operating income under the proposed sales commission plan? (Present ALL relevant scenarios)
c) After considering all factors, should you inform your manager about the omission made or simply keep quiet?