Quiz 9: Short-Term Profit Planning: Cost-Volume-Profit Cvp Analysis
Business
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Break-Even point:
It is a point at which gains equal losses; it means there are no gains and losses by doing that particular task.
At this break-even point cost or expenses are equal to revenue. This break-even point will be calculated by the following formulas.
• Cost-volume-profit (CVP) analysis extends the use of information provided by breakeven analysis.
• The main important part of CVP analysis is the point, where total revenues equal total costs. That is both fixed and variable.
• At this breakeven point (BEP), an enterprise will experience no income or loss.
• This BEP is an initial examination, which is done previous to the more detailed CVP analyses.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis.
The assumptions underlying CVP analysis are:
1. CVP analysis studies the behavior of both costs and revenues simultaneous throughout the relevant range of activity. (This assumption resembles the concept of volume discounts on either purchased materials or sales.)
2. CVP is useful for classifying accurately, as either fixed or variable.
3. Changes in activity are the only factors that affect costs.
4. All units produced are sold (there is no ending finished goods inventory).
5. When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.
• Finding the breakeven point is the initial step in CVP, since it is most important to know whether sales at a given level will at least cover the relevant costs.
The breakeven point can be determined with a mathematical equation, using contribution margin, or from a CVP graph.
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Contribution Margin:
The contribution margin ratio of the total contribution margin of a single unit to the selling price of that unit. It's the ratio of contribution margin to sales. It's the alteration in the operating profit linked with the modification in the sales price per unit. This ratio is useful for a decent estimate of the selling price per unit to achieve the breakeven.
The contribution margin is the distinction between the full revenue and total variable value. It's an associate degree pointer that shows the modifications in operational financial gain that changes in the range of units sold.
The formula for contribution margin is as follows:
For example, when the selling price for a product A is $90 and its variable cost is $50. Then the contribution margin ratio is calculated as follows:
So, the contribution margin ratio is 44.44%. This ratio helps to recognize the probable increase/decrease in the operating profit with respect to any changes in the selling price per unit.
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Cost volume and profit analysis is a technique that scrutinizes the variation in cost and volume levels and its effect on profit. This technique examines the effect of operating decisions on short-term profit. It defines the relationship between selling price, fixed cost, the variable value, price at which per unit can be sold and the output level. CVP analysis relies on a few assumptions. They are as follows: 1. For a given range of output, the revenue activity and the overall cost(fixed cost and variable cost) are probable to be linear. The assumption is based on a given CVP model on a given vary of activity and these are not valid outside of the appropriate range. 2. There are two components of total cost: fixed cost and variable cost. Fixed costs stay constant with a rise and reduce within the units of goods and services produced or sold. A fixed cost remains unchanged in total in a given period despite wide variation in the total activity and volume. Variable costs modify in proportion with a rise and reduce in the units of goods and services produced or sold. A variable cost changes in total in a given period with vary in the total activity and volume.
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Q 11Q 11
Doughton Bearings produces ball bearings for industrial equipment. In evaluating the financial data from the previous year, the accounting manager has determined that the company's unit sales price is $25 per bearing and the unit variable cost is $18 per bearing. What is the unit contribution margin
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Q 12Q 12
Felton Paper produces paper for textbooks. Felton plans to produce 500,000 cases of paper next quarter to sell at a price of $100 per case. Each case costs the company $80 to produce. What is the total contribution margin for next quarter
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Q 13Q 13
Ford Tops manufactures hats for baseball teams. Ford has fixed costs of $175,000 per quarter and sells each hat for $20. If the variable cost per hat is $10, how many hats must Ford sell each quarter to break even
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Q 14Q 14
The Cobb Clinic treats walk-in patients for various illnesses. The accounting manager has estimated that the clinic has $5,000 in monthly fixed costs in addition to a $20 cost per patient visit. If the charge is $30 per visit, how many visits per month does the clinic need to break even
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Q 15Q 15
Oxicon Inc. manufactures several different types of candy for various retail stores. The accounting manager has requested that you determine the sales dollars required to break even for next quarter based on past financial data. Your research tells you that the total variable cost will be $500,000, total sales will be $750,000, and fixed costs will be $75,000. What is the breakeven point in sales dollars
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Q 16Q 16
Williams Williams Co. produces plastic spray bottles and wants to earn a before-tax profit of $100,000 next quarter. Variable costs are $0.50 per bottle, fixed costs are $500,000, and the selling price is $1 per bottle. How many bottles must the company sell to meet this goal
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Q 17Q 17
Scott Power produces batteries. Scott has determined its contribution margin to be $8 per battery and its contribution margin ratio to be 0.4. What is the effect on profits of the sale of one additional battery Of one additional dollar of sales
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Q 18Q 18
ABC Audio sells headphones and would like to earn after-tax profits of $400 every week. Each set of headphones incurs variable costs of $5 and sells for $10. Rent and other fixed costs are $200 per week; the income tax rate is 20%. How many headphones must ABC sell per week to meet its profit goal
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Q 19Q 19
Franklin Cards sells greeting cards for $2 each and plans to sell 100,000 cards every quarter. The accounting manager has determined the company must sell 80,000 cards every quarter to break even. What is the margin of safety in units and sales dollars
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Q 20Q 20
May Clothing is a retail men's clothing store. May's variable cost is $20 per shirt and the sales price is $40 per shirt. May plans to sell 400,000 shirts for the year and at this level would generate a before tax profit of $2,500,000. What is the degree of operating leverage (DOL) at this volume level
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Q 21Q 21
Profit Planning Connelly, Inc., a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Since her business has grown, Jan DeJaney, the president, believes she needs an aggressive advertising campaign next year to maintain the company's growth. To prepare for the growth, the accountant prepared the following data for the current year:
Required
1. If the costs and sales price remain the same, what is the projected operating profit for the coming year
2. What is the breakeven point in units for the coming year
3. Jan has set the sales target for 35,000 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $200,000 for advertising. All other costs remain as in requirement 1. What will be the operating profit if the additional $200,000 is spent on advertising and sales rise to 35,000 units
4. What will be the new breakeven point if the additional $200,000 is spent on advertising (Prepare a contribution income statement to support your answer.) What is the percentage change in both fixed costs and in the breakeven point What general point is illustrated by this comparison
5. If the additional $200,000 is spent for advertising in the next year, what is the sales level (in units) needed to equal the current year's income at 30,000 units
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Q 22Q 22
Margin of Safety Harold McWilliams owns and manages a general merchandise store in a rural area of Virginia. Harold sells appliances, clothing, auto parts, and farming equipment, among a wide variety of other types of merchandise. Because of normal seasonal and cyclical fluctuations in the local economy, he knows that his business will also have these fluctuations, and he is planning to use CVP analysis to help him understand how he can expect his profits to change with these fluctuations. Harold has the following information for his most recent year. Cost of goods sold represents the cost paid for the merchandise he sells, while operating costs represent rent, insurance, and salaries, that are entirely fixed.
Required
1. What is Harold's margin of safety in dollars What is the margin of safety ratio
2. What is Harold's margin of safety and operating profit if sales should fall to $500,000
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Q 23Q 23
The Role of Income Taxes In 2013, Triad Company had fixed costs of $240,000 and variable costs of 75% of total sales revenue, earned $70,000 of net income after taxes, and had an income tax rate of 35%.
Required Determine:
1. Before-tax income.
2. Total contribution margin.
3. Total sales.
4. Breakeven point in dollar sales.
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Q 24Q 24
CVP Analysis with Income Taxes Cohen Company produces and sells socks. Variable costs are $6 per pair, and fixed costs for the year total $75,000. The selling price is $10 per pair.
Required Calculate the following:
1. The breakeven point in units.
2. The breakeven point in sales dollars.
3. The units required to make a before-tax profit of $40,000.
4. The sales in dollars required to make a before-tax profit of $35,000.
5. The sales, in units and in dollars, required to make an after-tax profit of $25,000 given a tax rate of 30%.
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Q 25Q 25
Cost Planning; Machine Replacement Vista Company manufactures electronic equipment. It currently purchases from an outside supplier the special switches used in each of its products. The supplier charges Vista $2 per switch. Vista's CEO is considering purchasing either machine A or machine B so the company can manufacture its own switches. The projected data are as follows:
Required
1. For each machine, what is the minimum number of switches that Vista must make annually for total costs to equal outside purchase cost
2. What volume level would produce the same total costs regardless of the machine purchased
3. What is the most profitable alternative for producing 200,000 switches per year
4. Which of the two decision alternatives would you recommend Why
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Q 26Q 26
Degree of Operating Leverage (DOL) The following sales and cost data (000s) are for two companies in the transportation industry:
Required
1. Calculate the degree of operating leverage (DOL) for each company. If sales increase from the present level, which company benefits more How do you know
2. Assume that sales rise 10% in the next year but that everything else remains constant. Calculate the percentage increase in profit for each company. Are the results what you expected Explain.
3. In what sense is DOL a measure of risk
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Q 27Q 27
Cost Planning: The Cost of an MBA; Time Value of Money The motivation for getting the MBA degree has many aspects-the prestige, greater opportunity for promotion, change of occupation, and an increase in pay. To focus just on this last motivation, suppose that you are interested in getting an MBA and are studying the various programs in the United States. You want to balance the cost of getting the degree against the future benefits in increase of pay. You have information on the cost of two MBA programs, which includes the cost of tuition, living expenses, and forgone pre-MBA salary for the two years you are in the MBA program. School A has an average cost of $100,000 and School B, a far more prestigious school at which you think your grades would qualify you to be a successful applicant, has a cost of $250,000.
Required Assume that you have a five-year planning horizon, that the difference in pay for a job after both schools would remain the same for all five years, and the relevant cost of borrowing is 6 percent. Based on increase in pay only, how great would the increase for a job after leaving School B have to be relative to School A for you to be indifferent between the two schools Hint: the present value factor for an annuity of five years at 6 percent is in Table 2 at the end of Chapter 12 and equals 4.212.
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Q 28Q 28
Cost Planning; Gasoline Prices In June 2008, when gasoline prices were at an all-time high, greater than $4 per gallon, Chrysler Motor Company promoted its Jeep vehicle with the offer of either $4,500 off the price of the vehicle or the guarantee that the buyer would not pay more than $2.99 per gallon of gas for the next three years (the details of the guarantee could vary by dealer).
Required
1. Assume that the Jeep vehicle you are interested in gets 15 mpg combined city/highway and that at the time of purchase you expected gasoline prices to average $5 per gallon over the next three years. How many miles would you have to drive the vehicle in the next three years to make the guarantee more attractive than the $4,500 discount
2. Assume the same information as in part 1 above, except the average price of gas for the next three years is not known, but you are likely to drive 8,500 miles per year. What is the breakeven gasoline price in the coming three years so that you would be indifferent between the two options
3. What are some important aspects of the decision that do not have to do with the price of gasoline and the $4,500 discount
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Q 29Q 29
Cost Planning; High-End Copiers Companies that have a high demand for making copies, both color and black and white, often choose to lease a high-end copier that provides fast and reliable service at a reasonable cost. The lease is usually for three to five years and the cost to the user is $0.01 per page for black and white copies and typically $0.10 per page for color copies. These are the terms of your current three-year lease contract with Ricoh Company, which is up for renewal this month; the lease terms are expected to be the same for the next three years, if renewed.
Hewlett-Packard Company (H-P) has recently developed an innovative copier that can reduce the costs of color copies. The copier measures exactly how much color is used in a color copy, so that the price of the copy can be determined by the amount of color used rather than a fixed price per page, so the cost could be as low as $.070 per page for a color copy. H-P calls this a "flexible-pricing" approach. Assume for this example that the cost of the leased copier (three-year lease) is only the per page chargethe initial lease cost is negligible, and the service costs would not differ between the H-P copier and the copier you are using now.
Your company is an advertising agency, Tanner and Jones, LLC, and the quality of the color copies is critical to your business success. The ability to rely on the copier at any time is also very important, as some customer requests require urgent attention. You believe that the Ricoh and H-P printers are of the same reliability, but you have not had experience with the H-P copier to be sure of the copy quality. The demonstration of the H-P copier has shown as good or better copy quality, but you have not had three years' experience with it to know what it would be like day to day.
Required
1. Assume that your company is considering the lease of one of these H-P copiers, and you expect that the average price for a color copy for your company would be $0.075 because you would carefully prioritize color copy jobs and reduce the number of copies requiring a large amount of color. You expect that training your copy center staff to properly use the new copier would cost about $12,400 for materials and lost work time. What is the breakeven number of color copies per year that would make you indifferent between the new H-P copier and your current copier
2. As in part 1 above, assume you expect that your per-copy cost for color copies with the H-P copier will be $0.075, the training costs are $12,400, and you expect to make 200,000 copies per year for the next three years. In your negotiations with Ricoh concerning the new lease and the cost of color copies, what price would you bargain for
3. Consider your choice between the copiers within the context of the competitive and business environment of Tanner and Jones. What are the issues you should consider in addition to cost of copies
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Q 30Q 30
Cost Structure of Retailers; The Internet Today's retailers are finding that online sales and service are a necessary ingredient of their overall marketing and selling strategy because of increased competition. In certain retail sectors, consumers are moving to the Internet in large numbers for the convenience and selection they find on the Internet. Unfortunately, the investment in resources, both equipment and labor, can be huge. Some studies show that less than a third of online retailers are profitable on Internet sales. As a result, some new consulting firms, software firms, and service providers have begun to provide e-commerce solutions for retailers.
Required
1. How does a consulting firm, service provider, or software firm help a retailer reduce cost and become more competitive for Internet sales What is the role of operating leverage in the retailer's decision to outsource online sales and service
2. What role if any does globalization play in a retailer's efforts to reduce costs on Internet sales
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Q 31Q 31
Structuring Sales Commissions Questar Electronics, a producer of a wide range of consumer products, is facing increasing competitive pressures from foreign producers. In response, Questar is reexamining its overall management control system, including the way the company compensates members of its sales force. Below are highly condensed data for two representative products that Questar sells:
Required
1. Under the assumption that salespeople are paid commissions equal to 10% of sales, which of the company's products will likely be more aggressively promoted Why
2. Can you suggest an alternative incentive plan, one that would better align employee and corporate interests (i.e., one that would motivate more goal-congruent behavior)
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Q 32Q 32
Multiple Product CVP Smith Company can produce two types of carpet cleaners, Brighter and Cleaner. Data on these two products are as follows:
The number of machine-hours to produce one unit of Brighter is 1 while the number of machine hours for each unit of Cleaner is 2. Total fixed costs for the manufacture of both products are $264,000.
Required
1. Using a spreadsheet, determine the breakeven point in total units for Smith Company, based on the assumption that the sales mix (on the basis of relative sales volume in units) stays constant. Use the weighted-average contribution margin approach.
2. At this breakeven level, how many units of each product are envisioned
3. What is the overall breakeven point in sales dollars (Use both an indirect approach, based on your answer to (2) above, and a direct approach, based on the weighted-average contribution margin ratio and the assumption that sales mix based on relative sales dollars stays constant.)
4. Of what potential managerial value is the information related to machine-hour consumption of the two products
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Q 33Q 33
CVP Analysis Lawn Master Company, a manufacturer of riding lawn mowers, has a projected income for 2010 as follows:
Required
1. Determine the breakeven point in sales dollars.
2. Determine the required sales in dollars to earn a before-tax profit of $7,250,000.
3. What is the breakeven point in sales dollars if the variable cost increases by 10 percent
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Q 34Q 34
Contribution Income Statements Using Excel; Sensitivity Analysis; Goal Seek
Required
1. Using the data in Exhibit 9.1, create an Excel spreadsheet to provide a sensitivity analysis of the effect on operating profit of potential changes in demand for HFI, Inc. Use Exhibits 9.2 and 9.6 as a guide.
2. Use the Goal Seek tool within Excel to determine which sales price would allow HFI to earn $100,000 operating profit, assuming that all the other cost information is the same as in Exhibit 9.1. Use Exhibit 9.5 as a guide.
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Q 35Q 35
CVP Analysis, DOL, and Margin of Safety (MOS) As noted in the text, the margin of safety (MOS) represents the amount by which sales (either actual or budgeted) can fall before the organization experiences a loss. On the other hand, the margin of safety ratio (MOS%) is the percentage by which sales can fall before a loss is experienced. This ratio is defined as MOS divided by budgeted or actual sales. Both measures are rough indicators of risk. Use the definition of MOS% and your algebraic skills to respond to the following requirement.
Required Demonstrate, using separate equations for MOS% and DOL that MOS% and DOL are functionally related. Specifically, show that MOS% =
. Of what interpretive or managerial value is this finding
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Q 36Q 36
CVP Analysis; Strategy Hank's Western Wear is a western hat retailer in Lubbock, Texas. Although Hank's carries numerous styles of western hats, each hat has approximately the same price and invoice (purchase) cost, as shown in the following table. Sales personnel receive large commissions to encourage them to be more aggressive in their sales efforts. Currently, the Lubbock economy is really humming, and sales growth at Hank's has been great. The business is very competitive, however, and Hank, the owner, has relied on his knowledgeable and courteous staff to attract and retain customers who otherwise might go to other western wear stores. Because of the rapid growth in sales, Hank is also finding the management of certain aspects of the business, such as restocking of inventory and hiring and training new salespeople, more difficult.
Required
1. Calculate the annual breakeven point, both in terms of units and in terms of sales dollars. (Show calculations.)
2. If Hank's sells 20,000 hats, what is its before-tax income or loss Support your answer by constructing a contribution income statement.
3. If Hank's sells 32,000 hats, what is its margin of safety (MOS) and margin of safety ratio (MOS%) Of what interpretive value are these two measures
4. Hank is considering the elimination of sales commissions completely and increasing salaries by $106,500 annually. What would be the new breakeven point in units What would be the before-tax income or loss if 20,000 hats are sold with the new salary plan
5. Identify and discuss the strategic and ethical issues in the decision to eliminate sales commissions (see requirement 4). How do these strategic concerns affect Hank's decision
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Q 37Q 37
Multiple Products Most businesses sell several products at varying prices. The products often have different unit variable costs. Thus, the total profit and the breakeven point depend on the proportions in which the products are sold. Sales mix is the relative contribution of sales among various products sold by a firm. Assume that the sales of Jordan, Inc., are the following for a typical year:
Assume the following unit selling prices and unit variable costs:
Fixed costs are $400,000 per year, of which $60,000 are batch-related and $340,000 are facilitiesrelated. Assume sales mix is constant in units.
Required
1. Determine the breakeven point in units.
2. Determine the number of units required for a before-tax net profit of $40,000.
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Q 38Q 38
CVP Analysis Horton Manufacturing Inc. (HMI) is suffering from the effects of increased local and global competition for its main product, a lawn mower that is sold in discount stores throughout the United States. The following table shows the results of HMI's operations for 2010.
Required
1. Compute HMI's breakeven point in both units and dollars. Also, compute the contribution margin ratio.
2. The manager believes that a $60,000 increase in advertising would result in a $135,000 increase in annual sales. If the manager is right, what will be the effect on the company's operating profit or loss
3. Refer to the original data. The vice president in charge of sales is certain that a 10 percent reduction in price in combination with a $50,000 increase in advertising will cause unit sales to increases by 20 percent. What effect would this strategy have on operating profit (loss)
4. Refer to the original data. During 2010, HMI saved $5 of unit variable costs per lawn mower by buying from a different manufacturer. However, the cost of changing the plant machinery to accommodate the new part cost an additional $30,000 in fixed cost per year. Was this a wise change, and why or why not
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Q 39Q 39
CVP Analysis in a Professional Service Firm Lang and Thomas, a local CPA firm, has been asked to bid on a contract to perform audits for three counties in its home state. Should the firm be awarded the contract, it must hire one new staff member at a salary of $41,000 to handle the additional workload. (Existing staff are fully scheduled.) The managing partner is convinced that obtaining the contract will lead to additional new profit-oriented clients from the respective counties. Expected new work (excluding the three counties) is 800 hours at an average billing rate of $60.00 per hour. Other information follows about the firm's current annual revenues and costs:
Should the firm win the contract, these audits will require 900 hours of expected work.
Required
1. If the managing partner's expectations are correct, what is the lowest bid the firm can submit and still expect to increase annual net income
2. If the contract is obtained at a price of $30,000, what is the minimum number of hours of new business in addition to the county work that must be obtained for the firm to break even on total new business
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Q 40Q 40
CVP Analysis; Sensitivity Analysis; Multiple Products; Strategy GoGo Juice is a combination gas station and convenience store located at a busy intersection. Recently a national chain opened a similar store only a block away; consequently sales have decreased for GoGo. In an effort to reclaim lost sales, GoGo has implemented a promotional effort; for every $10 purchase at GoGo, the customer receives a $1 coupon for the purchase of gasoline. The average gasoline customer purchases 15 gallons of gasoline at $2.50/gal. The results of an average month, prior to this coupon promotion are shown in the following chart.
Not included on the chart is the monthly cost of printing the coupons that is estimated to be $500. Coupons are issued on the basis of total purchases regardless of whether the purchases are paid in cash or paid by redeeming coupons. Assume that coupons are distributed to customers for 80 percent of the total sales. Also assume that all coupons distributed are used to purchase gasoline.
Required
1. If GoGo Juice implements the promotional coupon effort, calculate the profit (loss) before tax if the sales volume remains constant and the coupons are used to purchase gasoline. Assume the sales mix remains constant.
2. Calculate the breakeven sales for GoGo Juice if the promotional effort is implemented. Assume that the product mix remains constant.
3. Disregarding your responses to Requirements 1 and 2, assume the weighted contribution margin ratio, after implementation of the coupon program, is 30 percent. Calculate the profit (loss) before tax for GoGo Juice, assuming sales increase 20 percent due to the new program. Assume that the sales mix remains constant.
4. GoGo Juice is considering using sensitivity analysis in combination with cost-volume-profit analysis. Discuss the use of sensitivity analysis with cost-volume-profit analysis. Include in your discussion at least three factors that make sensitivity analysis prevalent in decision making.
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Q 41Q 41
CVP Analysis, Commissions, Ethics Marston Corporation manufactures pharmaceutical products sold through a network of sales agents in the United States and Canada. The agents are currently paid an 18 percent commission on sales; that percentage was used when Marston prepared the following budgeted income statement for the fiscal year ending June 30, 2010.
Since the completion of the income statement, Marston has learned that its sales agents are requiring a 5 percent increase in their commission rate (to 23 percent) for the upcoming year. As a result, Marston's president has decided to investigate the possibility of hiring its own sales staff in place of the network of sales agents and has asked Tom Markowitz, Marston's controller, to gather information on the costs associated with this change.
Tom estimates that Marston must hire eight salespeople to cover the current market area, at an average annual payroll cost for each employee of $80,000, including fringe benefits expense. Travel and entertainment expense is expected to total $600,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $150,000. In addition to their salaries, the eight salespeople will each earn commissions at the rate of 10 percent. The president believes that Marston also should increase its advertising budget by $500,000 if the eight salespeople are hired..
Required
1. Determine Marston Corporation's breakeven point in sales dollars for the fiscal year ending June 30, 2010, if the company hires its own sales force and increases its advertising costs.
2. If Marston continues to sell through its network of sales agents and pays the higher commission rate, determine the estimated volume in sales dollars that would be required to generate the same operating profit as projected in the budgeted income statement.
3. Describe the general assumptions underlying breakeven analysis that limit its usefulness.
4. What is the indifference point in sales for the firm to either accept the agents' demand or adopt the proposed change Which plan is better for the firm
5. What are the ethical issues, if any, that Tom should consider
(CMA Adapted)
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Q 42Q 42
CVP Analysis, Strategy, Critical Success Factors Garner Strategy Institute (GSI) presents executive- level training seminars nationally. Eastern University (EU) has approached GSI to present 40 one-week seminars during 2010. This activity level represents the maximum number of seminars that GSI is capable of presenting annually. GSI staff would present the week-long seminars in various cities throughout the United States and Canada.
Terry Garner, GSI's president, is evaluating three financial options for the revenues from Eastern: accept a flat fee for each seminar, receive a percentage of Eastern's profit before tax from the seminars, and form a joint venture to share costs and profits.
Estimated costs for the 2010 seminar schedule follow.
* Easterm's fixed costs are excluded because the amounts are not considered relevant for this decision (i.e., they will be incurred whether or not the seminars are presented). Eastern does not include these costs when calculating the profit before tax for the seminars.
EU plans to charge $1,200 per participant for each one-week seminar. It will pay all variable marketing, site costs, and materials costs.
Required
1. Assume that the seminars are handled as a joint venture by GSI and EU to pool costs and revenues.
a. Determine the total number of seminar participants needed to break even on the total costs for this joint venture. Show supporting computations.
b. Assume that the joint venture has an effective income tax rate of 30 percent. How many seminar participants must the joint venture enroll to earn a net income of $169,400 Show supporting computations.
2. Assume that GSI and EU do not form a joint venture, but that GSI is an independent contractor for EU. EU offers two payment options to GSI: a flat fee of $9,500 for each seminar, or a fee of 40 percent of EU's profit before tax from the seminars. Compute the minimum number of participants needed for GSI to prefer the 40 percent fee option over the flat fee. Show supporting computations.
3. What are the strategic and implementation issues for GSI to consider in deciding whether to enter into the joint venture For Eastern
(CMA Adapted)
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Q 43Q 43
CVP Analysis, Strategy, Uncertainty Computer Graphics (CG) is a small manufacturer of electronic products for computers with graphics capabilities. The company has succeeded by being very innovative in product design. As a spin-off of a large electronics manufacturer (ElecTech), CG management has extensive experience in both marketing and manufacturing in the electronics industry. A long list of equity investors is betting that the firm will really take off because of the growth of specialized graphic software and the increased demand for computers with enhanced graphics capability. A number of market analysts say, however, that the market for the firm's products is somewhat risky, as it is for many high-tech start-ups because of the number of new competitors entering the market, and CG's unproven technology.
CG's main product is a circuit board (CB3668) used in computers with enhanced graphics capabilities. Prices vary depending on the terms of sale and the size of the purchase; the average price for the CB3668 is $100. If the firm is able to take off, it might be able to raise prices, but it also might have to reduce the price because of increased competition. The firm expects to sell 150,000 units in the coming year, and sales are expected to increase in the following years. The future for CG looks very bright indeed, but it is new and has not developed a strong financial base. Cash flow management is a critical feature of the firm's financial management, and top management must watch cash flow numbers closely.
At present, CG is manufacturing the CB3668 in a plant leased from ElecTech using some equipment purchased from ElecTech. CG manufactures about 70 percent of the parts in this circuit board.
CG management is considering a significant reengineering project to significantly change the plant and manufacturing process. The project's objective is to increase the number of purchased parts (to about 55 percent) and to reduce the complexity of the manufacturing process. This would also permit CG to remove some leased equipment and to sell some of the most expensive equipment in the plant.
The per-unit manufacturing costs for 150,000 units of CB3668 follow:
General, selling, and administrative costs are $10 variable cost per unit and $1,250,000 fixed; these costs are not expected to differ for either the current or the proposed manufacturing plan.
Required
1. Compute the contribution margin and breakeven in units for CB3668, both before and after the proposed reengineering project. Assume all setup costs are included in fixed overhead.
2. Determine the number of sales units at which CG would be indifferent as to the current manufacturing plan or the proposed plan.
3. Explain briefly (a) what CG's strategy is (b) what you think it should be and (c) why.
4. Should CG undertake the proposed reengineering plan Using a spreadsheet, support your answer with sensitivity analysis and a discussion of short-term and long-term considerations.
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