Question

Required information Problem 11-40 Profitability Analysis; Pro Forma Income Statement (LO 11-5, 11-7] (The following information applies to the questions displayed below.] RayLok Incorporated has invented a secret process to improve light intensity and, as a result, manufactures a variety of products related to this process. Each product is independent of the others and is treated as a separate profit/loss division. Product (division) managers have a great deal of freedom to manage their divisions as they think best. Failure to produce target divisional income is dealt with severely: however, rewards for exceeding one's profit objective are, as one division manager described them, lavish. The DimLok Division sells an add-on automotive accessory that automatically dims a vehicle's headlights by sensing a certain intensity of light coming from a specific direction. DimLok has had a new manager in each of the 3 previous years because each manager failed to reach RayLok's target profit level. Donna Barnes has just been promoted to manager and is studying ways to meet the current target profit for DimLok. DimLok's two profit targets for the coming year are $920,000 (20% return on the investment in the annual fixed costs of the division) and $40 (pre-tax) profit for each Dimlok unit sold. Other constraints on the division's operations are as follows: • Production cannot exceed sales because RayLok's corporate advertising program stresses completely new product models each year, although the models might have only cosmetic changes. • DimLok's selling price cannot vary above the current selling price of $230 peifunit but may vary as much as 10% below $230. • A division manager can elect to expand fixed production or selling facilities; however, the target profit objective related to fixed costs is increased by 20% of the cost of any such expansion. Furthermore, a manager cannot expand fixed facilities by more than 30% of existing fixed cost levels without approval from the board of directors. Donna is now examining data gathered by her staff to determine whether DimLok can achieve its target profits of $920,000 and $40 per unit. A summary of these reports shows the following:

Answer 1

Answer is given below

Current Fixed cost $920,000 Profit target at 20% on Fixed Cost 1. $4,600,000 Fixed costs is |(Profit /20%) Selling price Variable cost $230 $110 $120 2. Contribution per unit $40 Profit per vehicle Revised Contribution per bike $80 Fixed cost and Profit needed $5,520,000 69,000 Number of bikes to be sold |(Fixed Cost+profit)/ Contribution per bike Since units is exceeding capacity of 52,000 units fixed cost will increase by 20% Revised Fixed cost Existing Fixed Cost $4,600,000 $1,120,000 $5,720,000 $1,144,000 Increase in Fixed cost Revised Fixed cost Profit at 20% on above Total Target needed $6,864,000 Considering all constraints In excess First 52,000 of 72,000 52,000 -72,000 units $230 $110 $120 Units units Selling price $200 $200 $80 Variable cost $110 Contribution per unit $90 $120 Profit per bike Revised Contribution per bike $40 $40 $40 $80 60,000 $4,800,000 $50 $80 Units 20,000 Total Contribution $1,000,000 Balance Contribution (A-B-C) $1,064,000 13,300 Units to achieve above contribution Units First Slab Second Slab Third Slab Total Units to achieve profit objective 60,000 20,000 13,300 93,300 Budgeted Income Statement 3.a) Revenue $11,960,000 (52,000 *230) (41,300*200) Total Revenue $8,260,000 $20,220,000 Less: Variable cost |(72,000 *110) (21,300*80) Total Variable cost Contribution Margin Fixed Cost $7,920,000 $1,704,000 $9,624,000 $10,596,000 $5,720,000 Operating Income $4,876,000 Profit Objective $1,144,000 $3,732,000 $4,876,000| 20% on Fixed cost Profit of $40 per bike sold on 93,300 units Total Profit 3.b) Answer is Yes Based on above working profit objective has been achieved