Assignment #1 Cost-Volume-Profit Analysis Total Marks 80 Problem 1 (15 marks) Trail King manufactures mountain bikes. Its sales mix and contribution margin information per unit is shown as follows: Sales mix Contribution margin Destroyer 15% $120 Voyager 60% $ 60 Rebel 25% $ 40 It has fixed costs of $5,440,000. Instructions Calculate the number of each type of bike that the company would need to sell in order to break even under this product mix. Problem 2 (30 marks) The following information for 2020 for Vinnie`s Cream Pie Fillings is available: Baking capacity 3,000 tonnes of filling Tonnage sold in year 1,800 Sales $900,000 Variable costs 495,000 Contribution margin $405,000 Fixed costs Manufacturing 90,000 Selling 112,500 Administration 45,000 Income before taxes $157,500 Income taxes @ 40% 63,000 Net income $ 94,500 Instructions Consider each of the following scenarios independently: a) Calculate the break-even volume in tonnes for the year. b) If Vinnie expects to sell 2,100 tonnes of filling next year, calculate the expected aftertax income, assuming costs and prices remain the same. c) Vinnie`s cousin says he can sell pie filling to a new company in a nearby city but will require Vinnie to pay $61,500 to advertise the product. In addition, Vinnie will have to pay his cousin $25 for each tonne sold. Calculate the number of tones that will have to be sold to maintain the current after-tax net income. d) Vinnie wants to ramp up production by investing in a new machine that will cost $58,500. The benefit will be that variable costs will decrease by $25 per tonne. Calculate the new break even if the new machine is purchased. e) Assume instead that Vinnie does not purchase the machine or begin selling in the new city. He is worried that per-tonne selling prices will decline by 10% and variable costs will increase by $40 per tonne. Calculate the sales volume in dollars needed if Vinnie is to maintain his after-tax income of $94,500. Problem 3 (35 marks) Simnet Solutions Inc. manufactures and sells cell phones. For the 2020 business plan, the company estimated the following : Selling Price per unit $750 Variable Cost per unit $450 Annual Fixed Cost $180,000 Net Income after tax $360,000 Tax Rate 25% The January financial statements reported that sales were not meeting expectations. For the first 3 months of the year only 400 units had been sold at the established price. With variable cost staying as planned, it was clear that the 2020 after tax projection would not be reached unless some action was taken. A management committee presented the following mutually exclusive alternatives to the president. 1. Reduce the selling price by $60. The sales team forecast that with significantly reduced selling price 3,000 units can be sold in the remainder of the year. Total fixed and variable unit cost will stay as budgeted. 2. Lower variable cost per unit by $20 through the use of less expensive direct materials. The selling price will also be reduced by $40, and sales of 2,800 units are expected for the remainder of the year. 3. Cut fixed cost by $20,000 and lower the selling price by 5%. Variable cost per unit will be unchanged and sales of 2,500 units are expected for the remainder of the year. Instructions a) Under the current production policy determine the number of units that the company must sell to: I. break-even Ii. achieve its desired operating income b) Determine which alternative the company should select to achieve its desired operating income.