Question

Last year’s income statement for King Salmon Sales follows.


The fishing season is only three to four months long, so labor costs (wages) are for employees who are college students and work in the summer. They are hired only as needed.

REQUIRED
A. The state government curtailed fishing because of low fish counts. Because of this restriction, King Salmon Sales can only buy 50,000 pounds. Assume the administrative cost is incurred only if the company sells salmon. Assuming the managers will decide to operate if the company can at least break even, should they operate this year?
B. Now assume that the administrative costs continue regardless of whether the company sells salmon. Assuming the managers will decide to operate if the company can at least break even, should they operate this year? Provide calculations and explain your answer.
C. Because of the salmon shortage, suppose that retail salmon prices are increasing. What is the breakeven price for King Salmon? Assume that administrative costs continue regardless of whether the company sells salmon.
D. Suppose the managers rely on the preceding CVP analysis to decide whether to operate the business. What assumptions are they making?
E. How reasonable are these CVP assumptions?
F. Suppose the owner of King Salmon Sales asked you about the company’s cost structure. Because volumes of fish fluctuate a great deal from one year to the next, the owner is wondering if some way can be found to reduce the risk of an operating loss. Write a brief memo to explain how the proportion of fixed and variable costs affects the risk of loss when operations are close to the breakevenpoint.


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  • CreatedJanuary 26, 2015
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