ACTG 2P12 Chapter Notes - Chapter 15: Operating Leverage, Fixed Cost, Earnings Before Interest And Taxes
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Feather Friends,Inc., distributes a high-quality wooden birdhouse that sells for$20 per unit. Variable | |||||||
costs are $8 per unit. Andfixed costs total $180,000 per year. | |||||||
FEATHER FRIENDS, INC. | |||||||
Unit price | $20 | ||||||
Variable cost per unit | 8 | ||||||
Annual fixed costs | 180,000 | ||||||
Estimated sales increase | $75,000 | ||||||
Operating results last year: | |||||||
Sales | $400,000 | ||||||
Less variable expenses | 160,000 | ||||||
Contribution margin | 240,000 | ||||||
Less fixed expenses | 180,000 | ||||||
Net operating income | $60,000 | ||||||
Expected percentage sales increase nextyear | 20% | ||||||
Units sold last year | 18,000 | ||||||
percentage reduction in sales price | 10% | ||||||
Increase in advertising expense | $30,000 | ||||||
Expected percentage increase in sales | 33% | ||||||
Increase in sales commission per unit | $1 | ||||||
Required: Answer the following independentquestions. | |||||||
1. What is the product's CM ratio? | |||||||
2. Use the CM ratio todetermine the break-even point in sales dollars. | |||||||
3. Due to an increase indemand, the company estimates that sales will increase by $75,000during the | |||||||
year.By how much should net operating income increase (or net lossdecrease) assuming that fixed | |||||||
costs do notchange? | |||||||
4. Assume that the operatingresult for last were as stated above. | |||||||
a.Compute the degree of operating leverage at the current level ofsales. | |||||||
b.The president expects sales to increase by 20% next year. By whatpercentage should net | |||||||
operatingincome increase? | |||||||
5. Refer to the original data.Assume that the company sold 18,000 units last year. The salesmanager | |||||||
isconvinced that a 10% reduction in the selling price, combined witha $30,000 increase in advertising, | |||||||
wouldcause annual sales in units to increase by one-third. Prepare twocontribution income | |||||||
statements, one showing the results of last year's operations andone showing the results of | |||||||
operations if these changes are made. Would you recommend that thecompany do as the sales | |||||||
managersuggest? | |||||||
6. Refer to the original data.Assume again that the company sold 18,000 units last year. Thepresident | |||||||
doesnot want to change the selling price. Instead, he wants to increasethe sales commission by $1 | |||||||
perunit. He thinks that this move, combined with some increase inadvertising, would increase annual | |||||||
salesby 25%. By how much could advertising be increased with profitsremaining unchanged? Do not | |||||||
prepare an income statement; use the incremental analysisapproach. | |||||||
1. Valley Sand and Gravel, Inc. are purchasing a new crusher for$500,000. It will have a ten year life and the salvage can be soldfor $50,000 at the end of year ten. There will be a major repairsat the end of year five and it will cost $10,000. Cash inflows areprojected to be $80,000 per year. The firmâs cost of capital is14%.
Calculate the NPV of the project.
Should they accept the project or not, and why?
2. Refer to Exhibits A and B below to answer the questions thatfollow.
Exhibit A
Jordan Corporation
Balance Sheet
September 30, 2015
Assets
Current Assets (in dollars)
Cash: 500,000
Accounts receivable: 600,000
Inventory: 950,000
Prepaid expenses: 50,000
Total Current Assets:2,100,000
Property, Plant and Equipment (in dollars)
Land: 250,000
Buildings, net of depreciation: 300,000
Equipment, net of depreciation: 800,000
Total Property, Plant and Equipment: 1,350,000
Total Assets: 3,450,000
Liabilities (in dollars)
Current Liabilities
Accounts payable: 700,000
Wages payable: 200,000
Interest payable: 25,000
Total Current Liabilities: 925,000
Long Term Liabilities
Notes Payable: 500,000
Bonds Payable: 450,000
Long Term Liabilities: 950,000
Total Liabilities: 1,875,000
Shareholders' Equity (in dollars)
Common stock: 500,000
Additional paid in capital: 100,000
Retained earnings: 975,000
Total Shareholder equity: 1,575,000
Total Liabilities and Equity: 3,450,000
Exhibit B
Jordan Corporation
Statement of Operations
Year Ended September 30, 2015
All figures in dollars
Sales: 6,000,000
Cost of goods sold: 3,600,000
Gross margin: 2,400,000
Selling and administrative expenses: 1,950,000
Operating income: 450,000
Interest expense: 50,000
Income before taxes: 400,000
Income taxes: 100,000
Net income: 300,000
Classify each of the above below as a liquidity, assetmanagement, financial leverage or profitability measure.
Quick (Acid Test) ratio
Current ratio
Accounts payable period
Collection period
Inventory turnover
Total debt to total assets
Interest coverage
Operating income margin
Net income margin
Return on assets
Return on equity
3. YouWin! manufacturers and sells custom wooden trophies. Eachof the companyâs two divisions, production and sales, has a managerwho is responsible for all costs in his/her division. The followingare selected costs from YouWin!:
Wood
Brass ornamentation
Engraving materials
Adhesive for trophy production
Salary of sales staff
Wages of machine operators
Wages of factory custodial staff
Production managerâs salary
Rent and insurance of factory building
Rent on headquarters building
Engraving machine
Electricity for factory building
Depreciation of office equipment
Maintenance on engraving machines
For each cost listed fill in the following chart. If a definitedistinction cannot be made for any category, indicate why and whatadditional information would be needed before classification can bemade.
Item | Product or Period | Direct or Indirect | Variable, Fixed orMixed | Controllable orUncontrollable (from view of Production Manager) |
---|
4. Gladnish Manufacturing Company operates two shifts ofworkers. Day workers are paid $12 per hour; evening workers arepaid a shift premium of 20%. Overtime premiums are 50% above day orevening wages. For August 2009 the following factory payrollinformation is available:
Total hours worked during the month (70% by day, 30% byevening): 18,000 hours
Overtime hours worked during the month (only by day workers):1,000
What were the total wages paid to employees during themonth?
Of the amount paid in Part A, how much would be considereddirect labor cost?
Of the indirect labor cost, how much is for shift premiums andhow much is for overtime premiums?