Question

Read the following scenario and complete the questions and tasks below. Mirabel Manufacturing is a small but growing company that manufactures and sells marine sonar equipment. They employee a national sales force and their primary customers are marine retailers and boat dealerships. The company has expanded over the last 5 years and Paul Mirabel, the founder, and CEO has become concerned that he no longer has a clear picture of their cost structure. He calls his CFO, Mary Jane Montgomery in for a meeting. "Mary Jane, I am concerned that I am not current on our cost structure and how that is impacting our bottom line," Paul begins. "Well, Paul, the company has grown considerably over the past 5 years, so I'm not surprised that you feel a little disconnected with how things are going," Mary Jane replied. She continued "In fact, I've been meaning to talk to you about a couple of big items such as increasing the sales commission to 15%. We've lost two of our best account managers in the last 9 months. It seems like we are behind the curve paying only 12% on gross sales." "What do you mean we are behind the curve," Paul replied angrily. "We have always been the leader in every aspect of our business." "Well, that may have been the case in the past, Paul, but frankly we need to step up our compensation package to stay competitive," Mary Jane replied. She continued, "And that's not everything. I met with Frank Jacobs from marketing and he said we need to have a bigger presence at the trade show in March. He told me he would need about $650,000 added to the marketing budget to support new marketing materials." "Come on, Mary Jane, how can we do that when we are going to have to increase commission?" He continued, "I spoke with Dan Clark in production and he indicated that we have two pieces of equipment that need to be replaced by the end of the quarter and that's going to set us back almost $1.2 million." Mary Jane shook her head. "Paul, I hate to bring this up but while we are talking costs, but Bob in purchasing stopped by the office and dropped off some revised cost information - it looks like several of our suppliers are talking about significant price increases by the end of the year." Paul slumped in his chair. "This is a mess, Mary Jane. Increasing commissions, new equipment, materials 277/2020,9

Answer 1

1. Formula for break even point in unit is

Fixed cost/contribution margin per unit

Here Fixed cost =Fixed Cost of goods sold + Fixed Marketing Expenses +Fixed Administrative

= $9,300,000 + $1,35,000+ $6,000,000 = $15,43,5000.

Contribution Margin per unit= Sales Per unit - variable expenses Per unit

Sales

Model 101 = 16000 units x $650 =$10,400,000

Model 201 = 19000 units x $750 =$14,250,000

Model 301 = 11000 units x $1100= $12,100,00

Hence Total Sales =$36,750,000

Sales Per unit = $36,750,000/(16000 units +19000 units +11000 units) =$798.91

Variable expenses per unit = (16000 units x $250 +19000 units x $200 +11000 units x $500)/(16000 units +19000 units +11000 units) =$289.13

Hence Contribution Margin = ($798.91-$289.13)=$509.78

Hence Break even point in Units = $15,43,5000/$509.78= 30278 units

Hence Break Even point in Sales Dollars = Sales Price X Break Even point units = $798.91 x 30278 units =$24,189,397.

2. If Sales commission 15% then sales commission increase per unit=($4,410,000 x 15%)/46000 units =$14.38

And variable expenses per unit would be = $289.13+$14.38=$303.51

Hence Contribution margin per unit would be = $789.91 -$303.51=$495.40

Break even point in units = $15,43,5000/$495.40=31157 units

Hence Break Even point in Sales Dollars = 31157 units x $789.91=$24,891,639.

Margin of Safety = Actuals Sales - Break Even points = $36,750,000-$24,891,639 =$11,858,361

3. If fixed increase by 10% then new fixed cost would be =$15,43,500 x 110%=$16,978,500

If variable expense reduce by 5% then new variable expenses per unit =$289.13x 95% =$274.67.

Contribution margin per unit =$789.91-$274.67 =$524.24

Break even points in units = $16,978,500/$524.24=32387 units

Break even point in Sales Dollars = 32387 units x $789.91 =$25,874,298.

4.if $6,500,00 invest in in fixed marketing expenses then fixed cost would stand = $15,43,500 +$6,500,00 =$16,085,000

if Sales of model 301 is increased by 8% then total sales would be

Model 101 = 16000 units x $650= $10,40,0000

Model 201 = 19000 units x $750= $14,250,000

Model 301 = (11000 units x 108%) x $1100 =$13,068,000

Total sales units =46880 units and Sales = $37,718,000 ,Sales Per unit =$804.56

Contribution margin per unit =$804.56 -$289.13=$515.43

Break even point in units =$16,085,000/ $515.43=31207 units

Break even points in Sales Dollars = 31207 units x $804.56= $25,107,866.