gross margin %:
(revenue - cost of goods sold) / revenue
expense ratio:
total expenses / revenue
return on sales:
net profit / revenue
Create a spreadsheet showing the income statement for acompany that had the following results last period.
units sold
100,000
consumer promotion
$1,800,000
unit cost
$40
personal selling
5 salespeople @ $80,000 each
price
$90
dealer promotions
$1,200,000
advertising
$1,500,000
product development
$700,000
1. Using $40 for unit cost, what is the effect of adding2 sales people, if sales increase by 5000 units?
gross margin %: | (revenue - cost of goods sold) / revenue |
expense ratio: | total expenses / revenue |
return on sales: | net profit / revenue |
Create a spreadsheet showing the income statement for acompany that had the following results last period.
units sold | 100,000 | consumer promotion | $1,800,000 |
unit cost | $40 | personal selling | 5 salespeople @ $80,000 each |
price | $90 | dealer promotions | $1,200,000 |
advertising | $1,500,000 | product development | $700,000 |
1. Using $40 for unit cost, what is the effect of adding2 sales people, if sales increase by 5000 units?
Related questions
5- 2 Colombo Soft-Serve Frozen Yogurt
In 1994, General Mills Incorporated, a $6 billion consumer goods company, acquired Colombo Frozen Yogurt. General Mills Inc. (GMI) believed they could add Colombo frozen yogurt to their existing product lineup to increase net sales with little addition in marketing cost.
Frozen yogurt is sold through two distinct segments â independent shops and impulse locations such as cafeterias, colleges, and buffets. Frozen yogurt is the main business for the shops whereas yogurt is incremental to the impulse locationsâ main business. GMIâs large sales force already served the impulse market.
The financial results in the first couple of years were mixed. Earnings increased slightly and then dropped each year even though sales volume was relatively flat. In total, merchandising costs dropped, while pricing promotion rates escalated. The GMI sales force focused on the impulse segments and pricing promotions were believed to be driving volume increases. However, volume in the shop segment declined at alarming rates and there was widespread dissatisfaction in the sales organization. While GMI knew sales by segment, they didnât track costs by segment. Instead costs were allocated based on sales dollars. The situation was ripe for a clearer look using ABC methods.
TODAYâS FROZEN YOGURT MARKET STRUCTURE:
When Colombo Yogurt Company began marketing soft-serve frozen yogurt in the early 1980âs, their main distribution was through independent yogurt shops. In the early 90âs, they faced competition from franchise operations such as TCBY and Freshens that replaced many of the independent yogurt shops. And the market changed as Foodservice operators such as cafeterias, colleges, and buffets started to add soft-serve yogurt to their business. By the late 90âs, these Impulse locations accounted for 2/3 of the soft-serve market.
In the late 90âs, Shop sales began to increase with the addition of distinctive new products such as smoothies, boosters, and granitas. The Shops make their living from the soft-serve business and must innovate or go out of business (as thousands have done in the last decade). On the other hand, the Impulse locations make their living from other items and the soft-serve trade is only performance topspin. These firms are unwilling to take any risk (new equipment or extra labor) to serve highly differentiated products like smoothies or granitas.
THE GMI-COLOMBO MARKETING PLAN:
The GMI Foodservice Division markets brands such as Cheerios, Yoplait, Betty Crocker, Gold Medal Flour, Hamburger Helper, Pop-Secret, and Chex Snack to Food Management Firms, Hospitals, and schools. Colombo yogurt was added to this product lineup and the Foodservice sales force covered both Shop and Impulse locations.
Salesforce: Colomboâs salesforce was merged into the Foodservice salesforce. Customers were reassigned to salespeople who already serviced that geographical area. The salespeople varied in their reaction to the product. Some found shops easy to sell to while others avoided the shops despite the possible lost commission. Many spent a lot of time helping their impulse customers understand how to use the machinery.
Merchandising Promotions: Colombo traditionally charged the Shops for merchandising that was large scale and eye popping (neon signs). The Shops used these signs to draw customers inside. GMI chose not to charge for merchandising and to provide the same large scale merchandising to both Shops and Impulse locations. Shops were very interested in the kits while many Impulse locations didnât even hang them up.
Pricing Promotions: Pricing promotions are a mainstay of GMIâs impulse location approach. GMIâs salesforce generally used these promotion events as an opportunity to visit their accounts and take advantage of the occasion to meet service needs and sell other products that may not be featured.
GMI made price promotions available to both segments of the market. While the deals were typically around $5 per case, they averaged $3 per case against all the volume shipped during the year. GMI marketing knew price was not a major decision factor for Shops and they did not target pricing promotions to them. However, Shops were aware of the promotions and took advantage of them.
THE BUSINESS STATUS â PRE-ABC:
| PROFIT AND LOSS BY SEGMENT â PRE-ABC | Impulse Segment | Yogurt Shops | Total |
| Sales in cases | 1,200,000 | 300,000 | 1,500,000 |
| Sales revenue | $23,880,000 | $5,970,000 | $29,850,000 |
| Less: Price Promotions | - $ 3,600,000 | - $ 900,000 | - $ 4,500,000 |
| Net Sales | $20,280,000 | $5,070,000 | $25,350,000 |
| Less: Cost of Goods Sold | - $13,800,000 | - $3,450,000 | - $17,250,000 |
| Gross Margin | $ 6,480,000 | $1,620,000 | $ 8,100,000 |
| Less: Merchandising | - $ 1,380,000 | - $ 345,000 | - $ 1,725,000 |
| Less: SG&A | - $ 948,000 | - $ 237,000 | - $ 1,185,000 |
| Net income | $ 4,152,000 | $1,038,000 | $ 5,190,000 |
ABC ANALYSIS OF COST OF GOODS SOLD:
Cost of Goods Sold is made up of $14,250,000 for ingredients, packaging, and storage and $3,000,000 for pick/pack and shipping. Since the product is the same across segments, the cost to produce should be the same. However, pick/pack and shipping costs were found to vary with whether or not the order was for a full pallet. Full pallets cost $75 to pick and ship whereas individual orders cost $2.25 per case. There are 75 cases in a pallet and the segments differ in their utilization of full pallets as shown below.
| Impulse Segment | Yogurt Shops | Total | |
| Cases in full Pallets | 60,000 | 240,000 | 300,000 |
| Individual cases | 1,140,000 | 60,000 | 1,200,000 |
| Total cases | 1,200,000 | 300,000 | 1,500,000 |
ABC ANALYSIS OF MERCHANDISING:
Merchandising costs consist mainly of kits costing $500 each. A review of where the kits were sent indicated that 3,450 kits were sent out and 90 of them were sent to shops.
ABC ANALYSIS OF SELLING, GENERAL AND ADMINISTRATIVE:
Since sales representatives service several products, their costs are allocated to the various products based on gross sales dollars. GMI gave diaries to 10% of the sales force in randomly selected markets of the country and asked them to track their time in activity classifications for 60 days. The diaries indicated that sales reps spent almost 3 times as much time on the yogurt than GMI had estimated. The total allocation to Yogurt jumped from $1,185,000 to $3,900,000. Of their time spent on Yogurt, only 1% of the time was spent on the shops.
REQUIRED:
1. Briefly summarize Colomboâs competitive environment and General Millsâ strategy in response to that environment.
2. Using the ABC analysis, determine new segment profitability statements.
3. Based on your analysis in Questions 1 and 2, what changes would you suggest to General Mills? Give specific examples and explain.
| #1 | Which of the following correctly describes fixed and variable cost behavior as total volume increases? | ||
| A. | Unit fixed costs stay the same and unit variable costs increase. | ||
| B. | Total fixed costs stay the same and total variable costs increase. | ||
| C. | Unit fixed costs decrease and total variable costs decrease. | ||
| D. | Unit fixed costs decrease and unit variable costs decrease. | ||
| #2 | The incremental profit generated by the sale of one additional unit is equal to the | ||
| A. | contribution margin per unit. | ||
| B. | selling price. | ||
| C. | margin of safety. | ||
| D. | incremental cost. | ||
| #3 | Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity. The company is currently selling 40,000 units at $19.60 per unit. Each unit has a variable cost of $9. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge? | ||
| A. | $15.25 | ||
| B. | $21.35 | ||
| C. | $19.60 | ||
| D. | $27.44 | ||
| #4 | ABC company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units. If the company uses cost-plus 20% for pricing, which of the following should the company use to determine the price? | ||
| A. | The company should use a unit cost of $8.70 per unit only at a volume of 40,000 units. | ||
| B. | The company should use a unit cost of $8.70 at any volume level. | ||
| C. | The company should use a unit price of $10.44 at any volume level. | ||
| D. | The company should ignore fixed costs for cost-plus pricing. | ||
| #5 | Which of the following is a grouping of overhead costs whose total is allocated using one allocation base? | ||
| A. | Cost objective | ||
| B. | Cost pool | ||
| C. | Direct cost | ||
| D. | Cost driver | ||
| #6 | Which one of the following is the preferred alternative when deciding between two options? | ||
| A. | Incremental profit is greater than under the other alternatives. | ||
| B. | Revenues are greater than under the other alternatives. | ||
| C. | Expenses are less than under the other alternatives. | ||
| D. | No opportunity or sunk costs exist. | ||
| #7 | The required rate of return used to calculate an investmentâs net present value is related to the firmâs | |||
| A. | contribution margin. | |||
| B. | cost of capital. | |||
| C. | total assets. | |||
| D. | Price/Earnings ratio. | |||
| #8 | A company is trying to decide whether to keep or drop the organic foods department in its grocery store. If organic foods are dropped, the manager will be laid off. What is the manager's salary in relation to the decision to keep or drop the department? | |||
| A. | A variable cost and therefore relevant | |||
| B. | Avoidable and therefore incremental | |||
| C. | Sunk and therefore not relevant | |||
| D. | A fixed cost and therefore not relevant | |||
| #9 | The following information relates to Ajax Widgets during the year. There was no beginning inventory. | |||
| Units produced | 11,000 | |||
| Units sold | 10,000 | |||
| Units in ending inventory | 1,000 | |||
| Fixed manufacturing overhead | $220,000 | |||
| How much fixed manufacturing overhead will be expensed during the year (included in Cost of Goods Sold) using full costing? | ||||
| A. | $220,000 | |||
| B. | $200,000 | |||
| C. | $20,000 | |||
| D. | $10,000 | |||
| #10 | If the required rate of return is greater than the internal rate of return of a potential investment, the company should judge the investment as acceptable. | |||
| A. | This is a True statement | |||
| B. | This is a False statement | |||
| C. | Not enough information provided. | |||
| #11 | The basic concept involved in time value of money calculations is that | |||
| A. | it is better to receive a dollar in the future than to receive a dollar today | |||
| B. | incremental revenues must exceed incremental costs. | |||
| C. | it is better to receive a dollar today than to receive a dollar in the future. | |||
| D. | it can only be applied to positive cash flows | |||
| #12 | Hanson Sports has three product lines: footballs, basketballs, and bats. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2016 follows: | ||||
| Footballs | Basketballs | Bats | Total | ||
| Sales | $600,000 | $800,000 | $400,000 | $1,800,000 | |
| Cost of goods sold | 260,000 | 400,000 | 230,000 | 890,000 | |
| Gross margin | 340,000 | 400,000 | 170,000 | 910,000 | |
| Less other variable costs | 85,000 | 120,000 | 80,000 | 285,000 | |
| Contribution margin | 255,000 | 280,000 | 90,000 | 625,000 | |
| Less direct salaries | 50,000 | 60,000 | 45,000 | 155,000 | |
| Less common fixed costs | 85,000 | 100,000 | 55,000 | 240,000 | |
| Net income | $120,000 | $120,000 | -$10,000 | $230,000 | |
| Since the profit for bats is a net loss, the company is considering dropping this product line. What is the incremental $ effect on total net income of dropping the Bats line? | |||||
| #13 | Right Air Supply sells a specialized air filter that has a variable cost of $10 each. | ||||
| Fixed costs are estimated to be $700,000 across all levels of sales shown below. | |||||
| Units Sold | Unit Price | CM per unit x Qty | Fixed Costs | Profit | |
| 90,000 | $33 | 700,000 | |||
| 100,000 | $31 | 700,000 | |||
| 110,000 | $30 | 700,000 | |||
| 120,000 | $28 | 700,000 | |||
| Which price should Right Air Supply charge to maximize profits? | |||||
| #14 | Randolph Corporation sells a single product at a price of $275 per unit. Variable cost per unit is $135 and fixed costs total $356,860. If sales are expected to be $825,000, what is the companyâs margin of safety? | ||||
| #15 | Roger Excavating Company experienced the following costs in 2016: | ||||
| Direct materials | $1.75 per unit | ||||
| Direct labor | $2.00 per unit | ||||
| Variable manufacturing overhead | $2.50 per unit | ||||
| Variable selling | $0.75 per unit | ||||
| Fixed manufacturing overhead | $50,000 | ||||
| Fixed selling | $15,000 | ||||
| Fixed administrative | $5,000 | ||||
| During 2016, the company manufactured 100,000 units and sold 80,000 units. If the average selling price per unit was $22.65, what is the amount of the companyâs contribution margin per unit? | |||||
