Question

need help with question d.1 that is in brackets

Please note assignments must be completed on a group basis. Each group must consist of 2-3 students. Due date February 26, 2020 at the beginning of class. Late submissions will be assessed a 10% penalty per day and will not be accepted after the assignments have been returned to students or solutions have been posted to Moodle. Mrs. Potts, the president of B & B Products Limited has come to you for assistance as she is worried because sales of Product A have been declining lately. She has provided you with the following information for the sales & expenses of Product A for the year ended January 31, 2020: Sales Cost of goods sold Selling expenses Wares Administrative expenses Advertising expenses 850,000 474,500 125,000 100,000 75,000 25,000 Additional information: - selling expenses are 75% variable & 25% fixed - administrative expenses are 30% variable & 70% fixed - wages and advertising expenses are 100% fixed - the company sold 17,000 units of Product A in the year ended January 31, 2020. Required: (a) Prepare a contribution format income statement for the year ended January 31, 2020. Include per unit & columns (b) Calculate breakeven point both in terms of sales dollars and units. (c) Calculate the margin of safety in dollars & the degree of operating leverage Idl in an effort to try & Improve sales Mrs. Potts is considering the following options: 1. Mrs. Potts feels that if they begin paying their sales people a commission of $2.00 per unit that sales volume will increase by 15% while their fixed costs for wages will decrease by $10,000. 2. Mr. Cogsworth, the sales manager feels that if they decrease the selling price by 10% & increase advertising by $5,000 they will sell an additional 5,000 units Write a memo to Mrs. Potts telling her which option if any you would recommend. Show calculation to support your answer. Mound to 2 decimal places in calculating per unit & % amounts.

Answer 1

Working Note:

Particulars	Total Amount	Variable expenses	Fixed expenses
Cost of goods sold	474,500.00
Selling expenses	125,000.00	93750	31250
Wages	100,000.00	0	100,000.00
Administrtive expenses	75,000.00	22500	52500
Advertising expenses	25,000.00	0	25,000.00
Sales	$      850,000.00
Sales unit	17,000.00	units
Sale Price	$                 50.00	Per unit

Here Cost of goods will include 'wages' too since wages is a direct expense for the production.

Since 'wages' expense is fixed, cost of goods includes a fixed expense of $ 100000

Cost of goods excluding wages expense = 474500-100000

= 374500

(a)

Contribution Margin Income Statement for the year ended January 31,2020
Particulars	Per unit	Amount	Amount	%
Sales	50.00		850,000.00	100%
Less: Variable Cost
Cost of Goods sold	22.03	374,500.00		44.06%
Administrtive expenses	1.32	22,500.00		2.65%
Selling expenses	5.51	93,750.00		11.03%
	28.87		490,750.00	57.74%
Contribution Margin	21.13		359,250.00	42.26%
Less: Fixed Cost
Cost of goods sold(wages)		100,000.00		11.76%
Administrative expenses		52,500.00		6.18%
Advertising expenses		25,000.00		2.94%
Selling expenses		31,250.00		3.68%
			208,750.00	24.56%
Net Income	8.85		150,500.00	17.71%

Note: Fixed cost per unit is not included in ' contribution margin income statement' since its usually accepted practice to not show fixed cost per unit. However the student may include it if that's necessary as per his study materials.

(b) Break even point( in units) = Total fixed cost/ Contribution per unit

= 208750/21.13

= 9879.32 units or

= 9880 units (rounded)

Break even point (in dollar) = Total fixed cost/ Contribution margin ratio

= 208750 / 42.26%

= $ 493965.93 or

= $ 494000(rounded)

Contribution margin ratio= Contribution/ Total revenue

= 359250/850000

= 42.26%   

  

Alternatively Break even point (in dollar)=Break even point( in units) * selling price $ 50

= 9880 units * $ 50

= $ 494000

(c) Margin of safety = Actual sales - Break even sales

= 850000- 494000

= $ 356000

Degree of operating leverage= (Total Sales – Variable costs) /   (Total Sales – Variable costs - Fixed costs)

= (850000 - 490750) / (850000 - 490750 - 208750)

= 359250 / 150500

= 2.3870

=2.39(rounded)​

(d) (1)

If Sales commision is given:-
Particulars	Amount	Amount	Calculations
Sales		977,500.00	850000* 115% (19550 units)
Less: Variable Cost
Cost of Goods sold	430,675.00		(374500*115%)
Administrtive expenses	25,875.00		(22500*115%)
Selling expenses	107,812.50		(93750*115%)
Selling commission	39,100.00		19550*$2
		603,462.50
Contribution Margin		374,037.50
Less: Fixed Cost
Cost of goods sold(wages)	90,000.00
Administrative expenses	52,500.00
Advertising expenses	25,000.00
Selling expenses	31,250.00
		198,750.00
Net Income		175,287.50

(2)

If selling price decrease by 10% & increase advertising cost by $ 5000
New sales= 17000+5000	22,000.00
New selling price= 50* 90%	45.00
New advertising cost	30,000.00
Particulars	Amount	Amount	Units	Calculation
Sales		990,000.00	22,000.0	22000*45
Less: Variable Cost
Cost of Goods sold	484,647.06			(374500/17000)*22000
Administrative expenses	29,117.65			(22500/17000)*22000
Selling expenses	121,323.53			(93750/17000)*22000
		635,088.24
Contribution Margin		354,911.76
Less: Fixed Cost
Cost of goods sold(wages)	100,000.00
Administrtive expenses	52,500.00
Advertising expenses	30,000.00			25000+5000
Selling expenses	31,250.00
		213,750.00
Net Income		141,161.76

MEMO

As per the first option, Net income is $175,287

As per second option, net income is $ 141,161.76

So , there is a increase profit of 34,125.24 with the first option. Hence that is more preferable.

	1st option	2nd option
Fixed cost	198,750.00	213,750.00
Contribution	374,037.50	354,911.00
Units	19,550.00	22,000.00
Contribution per unit	19.13	16.13
Breakeven point	10,388.16	13,249.80

Additionally Contribution per unit is more for option 1. And break even point is less for option 1.

Hence OPTION 1 is preferrable