Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 81

CVP application — expand existing product line? Nautical Canvas Co. currently makes and sells two models of a boat cover. Data applicable to the current operation are summarized in the following columns labeled Current Operation. Management is considering adding a Value model to its current Luxury and Economy models. Expected data if the new model is added are shown in the following columns labeled Proposed Expansion:

	Current Operation		Proposed Expansion
	Luxury	Economy	Luxury	Economy	value
Selling price per unit	$2,000	$1,200	$2,000	$1,200	$1,500
Variable expenses per unit	800	700	800	700	800
Annual sales volume—units	1,000	2,000	600	1,700	800
Fixed expenses for year	Total of $700,000		Total of $840,000

Required:

a.Calculate the company’s current total contribution margin and the current average contribution margin ratio.

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b. Calculate the company’s current amount of operating income.

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c. Calculate the company’s current break-even point in dollar sales.

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d. Explain why the company might incur a loss, even if the sales amount calculated in part c was achieved and selling prices and costs didn’t change.

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e. Calculate the company’s total operating income under the proposed expansion.

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f. Based on the proposed expansion data, would you recommend adding the Value model? Why or why not?

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g. Would your answer to part f change if the Value model sales volume were to increase to 1,000 units annually, and all other data remained the same? Why or why not?

Step 1 of 7

a) and b)

The following spreadsheet shows the calculation of:

a) Current total margin contribution

b) Current average contribution margin ratio

c) Current amount of operating income

Thus the current total contribution is and the operating income that is required in part b is .