Question

HRM732

Individual Assignment #2 (30 Marks) 15% of the overall grade for the course

The year has passed and Ron has become used to being able to come to you with more and more complex finance and accounting questions about this Ukrainian Division. He has come into your office in the middle of November of the following year. Your projects are going quite well as he has a new task for you. He’s been reviewing the operations of the Ukrainian plant and has some questions about the Income Statement. The plant appears to be much more profitable than the other bottling plants within the company and he’s wondering about implementing some of the practices that he has seen there into Canadian Bottling sites. He has provided you with the Income Statement that the Canadian finance team has provided him and wants some key pieces of information from you.

Ukrainian Bottling Company Inc.
Income Statement
For the Year Ended October 31st, XXXX
Revenue		$650,000.00
Cost of Goods Sold
	Labour	$75,000.00
	Material	$50,000.00
Total Cost of Goods Sold		$125,000.00
Gross Profit		$525,000.00
Expenses
	Packaging Labour	$67,000.00
	Electricity	$14,000.00
	Amortization	$32,000.00
	Rent	$15,000.00
	Shipping	$160,000.00
Total Expenses		$288,000.00
Net Income		$237,000.00

An executive summary of their financial position has been provided by the Ukrainian Management team; all of this information appears to be useful to them but, only some is relevant to you. Highlights of the financial figures are as follows:

Current number of unit produced:	12,000
Number of Employees on Staff:	521
Original cost of Smelting Machinery:	$85,000
Number of Shares Outstanding:	125,000
Trading Price per Share:	$12

Required:

1. Identify all the expenses above as being either Fixed or Variable. For expenses labeled Shipping, Amortization and Electricity, explain why you chose either fixed or variable. (7 Marks)
2. Using your cost behaviour breakdown, calculate the Contribution Margin for each unit produced. (7 Marks)
3. What would be the number of units necessary to produce for a breakeven scenario? (5Marks)
4. Management has recently discovered that they are now able to lower their labour costs from 67,000 to 55,000 within the year with all other costs remaining the same. What is the Contribution Margin now? (7 Marks)
5. Calculate the Gross Profit Margin and Net Profit Margin Ratios. (4 Marks)

Answer 1

I.

Identify all the expense as follows:

S.no	Expenses	Fixed or Variable	Reason
1	Labor, Material, and Packaging Labor	Variable	It will change due to a change in production or sales.
2	Rent Expenses	Fixed cost	It will not change due to a change in any level of production.
3	Shipping expenses	Variable	It will change due to the level of sales.
4	Amortization	Fixed	It is shown as a deduction from intangible assets and will not change due to business activity change.
5	Electricity	Variable	It will change as the level of consumption increases or decrease.

__________________________________________________________________________

II.

calculate the Contribution Margin for each unit produced:

Contribution Margin per unit:
Sales ($650,000/12,000 units)		$54.17
Less: Variable cost
Material	$50,000
Labor	$75,000
packaging Labor	$67,000
Shipping	$160,000
Electricity	$14,000
Total variable cost	$366,000
Units	12,000
Variable cost per unit ($366,000/12,000)		($30.50)
Contribution margin per unit		$23.67

_____________________________________________________________________

III.

Compute the number of units necessary to produce for a breakeven scenario:

Breakeven unit = Fixed Cost  $\div$ Contribution margin per unit

= $47,000 $\div$ $2367

= 1986 units

Fixed cost = Amortization + Rent expense   

= $32,000 + $15,000

= $47,000

______________________________________________________________________

IV.

Compute contribution margin, if Management has recently discovered that they are now able to lower their labor costs from 67,000 to 55,000 within the year with all other costs remaining the same:

Sales price per unit		$54.17
Existing variable cost	$366,000
Reduction in labor cost	($12,000)
New Cost	$354,000
Units	12,000
New Variable cost per unit ($354,000/12,000 units)		($29.50)
Contribution margin per unit		$24.67

_____________________________________________________________________

V.

Compute Gross profit margin and Net profit margin ratios:

Gross profit margin = Gross profit  $\div$ Sales

= $525000  $\div$ $650000

= 80.77%

Gross profit = Sales - COGS

= $650,000 - $125,000 = $525,000

_______________________________________________________

Net profit margin = Net Income $\div$ Sales

= $237,000 $\div$ $650,000

= 36.46%