What is the monthly break-even point for the new toy in unit sales and dollar sales.
Instructions:1. complete the following activities in good form. Use excel orword only. Provide all supporting calculations to show how you arrived atyour numbers Part A: Changes in Fixed and Variable Costs; Break-Even and TargetProfit AnalysisNeptune Company produces toys and other items for use in beach and resort areas. Asmall, inflatable toy has come onto the market that the company is anxious to produceand sell. The new toy will sell for $2.80 per unit. Enough capacity exists in thecompanys plant to produce 30,300 units of the toy each month. Variable expenses tomanufacture and sell one unit would be $1.78, and fixed expenses associated with thetoy would total $45,859 per month.The companys Marketing Department predicts that demand for the new toy will exceedthe 30,300 units that the company is able to produce. Additional manufacturing spacecan be rented from another company at a fixed expense of $2,293 per month. Variableexpenses in the rented facility would total $1.96 per unit, due to somewhat less efficientoperations than in the main plant.Required:1. What is the monthly break-even point for the new toy in unit sales and dollar sales.2. How many units must be sold each month to attain a target profit of $10,752 permonth?3. If the sales manager receives a bonus of 20 cents for each unit sold in excess of thebreak-even point, how many units must be sold each month to attain a target profit thatequals a 24% return on the monthly investment in fixed expenses?(For all requirements, Round per unit to 2 decimal places, intermediate and finalanswers to the nearest whole number.)Part B: CVP Applications; Contribution Margin Ratio; Break-EvenAnalysis; Cost StructureDue to erratic sales of its sole producta high-capacity battery for laptop computersPEM, Inc., has been experiencing financial difficulty for some time. The companyscontribution format income statement for the most recent month is given below:Sales (12,500 units × $30 per unit) $ 375,000Variable expenses 187,500Contribution margin 187,500Fixed expenses 210,000Net operating loss $ (22,500 )Required:1. Compute the companys CM ratio and its break-even point in unit sales and dollarsales.2. The president believes that a $6,700 increase in the monthly advertising budget,combined with an intensified effort by the sales staff, will result in an $85,000 increasein monthly sales. If the president is right, what will be the increase (decrease) in thecompanys monthly net operating income?3. Refer to the original data. The sales manager is convinced that a 10% reduction inthe selling price, combined with an increase of $35,000 in the monthly advertisingbudget, will double unit sales. If the sales manager is right, what will be the revised netoperating income (loss)?4. Refer to the original data. The Marketing Department thinks that a fancy newpackage for the laptop computer battery would grow sales. The new package wouldincrease packaging costs by $0.60 per unit. Assuming no other changes, how manyunits would have to be sold each month to attain a target profit of $4,800?5. Refer to the original data. By automating, the company could reduce variableexpenses by $3 per unit. However, fixed expenses would increase by $53,000 eachmonth.a. Compute the new CM ratio and the new break-even point in unit sales and dollarsales.b. Assume that the company expects to sell 20,300 units next month. Prepare twocontribution format income statements, one assuming that operations are notautomated and one assuming that they are. (Show data on a per unit and percentagebasis, as well as in total, for each alternative.)c. Would you recommend that the company automate its operations (Assuming that thecompany expects to sell 20,300)?Part C: Relevant Cost/Special Order DecisionsPolaski Company manufactures and sells a single product called a Ret. Operating atcapacity, the company can produce and sell 30,000 Rets per year. Costs associatedwith this level of production and sales are given below:Unit TotalDirect materials $ 15 $ 450,000Direct labor 8 240,000Variable manufacturing overhead 3 90,000Fixed manufacturing overhead 9 270,000Variable selling expense 4 120,000Fixed selling expense 6 180,000Total cost $ 45 $ 1,350,000The Rets normally sell for $50 each. Fixed manufacturing overhead is $270,000 peryear within the range of 25,000 through 30,000 Rets per year.Required:1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Retsthrough regular channels next year. A large retail chain has offered to purchase 5,000Rets if Polaski is willing to accept a 16% discount off the regular price. There would beno sales commissions on this order; thus, variable selling expenses would be slashedby 75%. However, Polaski Company would have to purchase a special machine toengrave the retail chains name on the 5,000 units. This machine would cost $10,000.Polaski Company has no assurance that the retail chain will purchase additional units inthe future. What is the financial advantage (disadvantage) of accepting the specialorder?2. Refer to the original data. Assume again that Polaski Company expects to sell only25,000 Rets through regular channels next year. The U.S. Army would like to make aone-time-only purchase of 5,000 Rets. The Army would pay a fixed fee of $1.80 per Ret,and it would reimburse Polaski Company for all costs of production (variable and fixed)associated with the units. Because the army would pick up the Rets with its own trucks,there would be no variable selling expenses associated with this order. What is thefinancial advantage (disadvantage) of accepting the U.S. Armys special order?3. Assume the same situation as described in (2) above, except that the companyexpects to sell 30,000 Rets through regular channels next year. Thus, accepting theU.S. Armys order would require giving up regular sales of 5,000 Rets. Given this newinformation, what is the financial advantage (disadvantage) of accepting the U.S. Armysspecial order?Part D: Relevant Cost/Make or Buy DecisionSilven Industries, which manufactures and sells a highly successful line of summerlotions and insect repellents, has decided to diversify in order to stabilize salesthroughout the year. A natural area for the company to consider is the production ofwinter lotions and creams to prevent dry and chapped skin.After considerable research, a winter products line has been developed. However,Silvens president has decided to introduce only one of the new products for this comingwinter. If the product is a success, further expansion in future years will be initiated.The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-typetube. The product will be sold to wholesalers in boxes of 24 tubes for $14 per box.Because of excess capacity, no additional fixed manufacturing overhead costs will beincurred to produce the product. However, a $130,000 charge for fixed manufacturingoverhead will be absorbed by the product under the companys absorption costingsystem.Using the estimated sales and production of 130,000 boxes of Chap-Off, the AccountingDepartment has developed the following manufacturing cost per box:Direct material $ 5.80Direct labor 4.20Manufacturing overhead 2.50Total cost $ 12.50The costs above relate to making both the lip balm and the tube that contains it. As analternative to making the tubes for Chap-Off, Silven has approached a supplier todiscuss the possibility of buying the tubes. The purchase price of the suppliers emptytubes would be $1.95 per box of 24 tubes. If Silven Industries stops making the tubesand buys them from the outside supplier, its direct labor and variable manufacturingoverhead costs per box of Chap-Off would be reduced by 10% and its direct materialscosts would be reduced by 20%.Required:1. If Silven buys its tubes from the outside supplier, how much of its own Chap-Offmanufacturing costs per box will it be able to avoid? (Hint: You need to separate themanufacturing overhead of $2.50 per box that is shown above into its variable and fixedcomponents to derive the correct answer.)2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys itstubes from the outside supplier?3. What is the financial advantage (disadvantage) in total (not per box) if Silven buys130,000 boxes of tubes from the outside supplier?4. Should Silven Industries make or buy the tubes?5. What is the maximum price that Silven should be willing to pay the outside supplierfor a box of 24 tubes?6. Instead of sales of 130,000 boxes of tubes, revised estimates show a sales volume of161,000 boxes of tubes. At this higher sales volume, Silven would need to rent extraequipment at a cost of $51,000 per year to make the additional 31,000 boxes of tubes.Assuming that the outside supplier will not accept an order for less than 161,000 boxesof tubes, what is the financial advantage (disadvantage) in total (not per box) if Silvenbuys 161,000 boxes of tubes from the outside supplier? Given this new information,should Silven Industries make or buy the tubes?7. Refer to the data in (6) above. Assume that the outside supplier will accept an orderof any size for the tubes at a price of $1.95 per box. How many boxes of tubes shouldSilven make? How many boxes of tubes should it buy from the outside supplier?Part E: Relevant Cost/Sell or Process FurtherCome-Clean Corporation produces a variety of cleaning compounds and solutions forboth industrial and household use. While most of its products are processedindependently, a few are related, such as the companys Grit 337 and its Sparkle silverpolish.Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.60 a poundto make, and it has a selling price of $6.80 a pound. A small portion of the annualproduction of Grit 337 is retained in the factory for further processing. It is combinedwith several other ingredients to form a paste that is marketed as Sparkle silver polish.The silver polish sells for $5.00 per jar.This further processing requires one-fourth pound of Grit 337 per jar of silver polish. Theadditional direct variable costs involved in the processing of a jar of silver polish are:Other ingredients $ 0.60Direct labor 1.40Total direct cost $ 2.00Overhead costs associated with processing the silver polish are:Variable manufacturing overhead cost 25 % of direct labor costFixed manufacturing overhead cost (per month)Production supervisor $ 3,200Depreciation of mixing equipment $ 1,500The production supervisor has no duties other than to oversee production of the silverpolish. The mixing equipment is special-purpose equipment acquired specifically toproduce the silver polish. It can produce up to 6,500 jars of polish per month. Its resalevalue is negligible and it does not wear out through use.Advertising costs for the silver polish total $3,800 per month. Variable selling costsassociated with the silver polish are 5% of sales.Due to a recent decline in the demand for silver polish, the company is wonderingwhether its continued production is advisable. The sales manager feels that it would bemore profitable to sell all of the Grit 337 as a cleaning powder.Required:1. How much incremental revenue does the company earn per jar of polish by furtherprocessing Grit 337 rather than selling it as a cleaning powder? (Round your answerto 2 decimal places.)2. How much incremental contribution margin does the company earn per jar of polishby further processing Grit 337 rather than selling it as a cleaning powder? (Round yourintermediate calculations and final answer to 2 decimal places.)3. How many jars of silver polish must be sold each month to exactly offset theavoidable fixed costs incurred to produce and sell the polish? (Round yourintermediate calculations to 2 decimal places.)4. If the company sells 8,700 jars of polish, what is the financial advantage(disadvantage) of choosing to further process Grit 337 rather than selling is as acleaning powder? (Enter any disadvantages as a negative value. Round yourintermediate calculations to 2 decimal places.)5. If the company sells 10,900 jars of polish, what is the financial advantage(disadvantage) of choosing to further process Grit 337 rather than selling is as acleaning powder? (Enter any disadvantages as a negative value. Round yourintermediate calculations to 2 decimal places.)Part F: Relevant Cost/Shutting Down or Continuing to Operate a PlantBirch Company normally produces and sells 43,000 units of RG-6 each month. Theselling price is $20 per unit, variable costs are $10 per unit, fixed manufacturingoverhead costs total $160,000 per month, and fixed selling costs total $38,000 permonth.Employment-contract strikes in the companies that purchase the bulk of the RG-6 unitshave caused Birch Companys sales to temporarily drop to only 9,000 units per month.Birch Company estimates that the strikes will last for two months, after which time salesof RG-6 should return to normal. Due to the current low level of sales, Birch Company isthinking about closing down its own plant during the strike, which would reduce its fixedmanufacturing overhead costs by $48,000 per month and its fixed selling costs by 10%.Start-up costs at the end of the shutdown period would total $13,000. Because BirchCompany uses Lean Production methods, no inventories are on hand.Required:1. What is the financial advantage (disadvantage) if Birch closes its own plant for twomonths?2. Should Birch close the plant for two months?3. At what level of unit sales for the two-month period would Birch Company beindifferent between closing the plant or keeping it open?
