Whittier Company plans to sell 1,000 mowers at $400 each in the coming year. Product costs include: Direct materials per mower $180 direct labor per mower $100 Variable factory overhead per mower $25 Total fixed factory overhead $15,000 Variable selling expense is a commission of $20 per mower; fixed selling and administrative expense totals $30,000.
a. Prepare a contribution margin income statement.
b. Calculate the contribution margin ratio.
c. Calculate the break-even point in sales dollars.
d. Calculate the margin of safety, in terms of sales revenue.
Scenario 2 The executive team at Whittier Company has requested that you perform some analysis. In some cases, you will need to rearrange the equations used above in question parts b, c or d to perform the requested analysis. Respond to question parts e - k in this CengageNOW problem regarding the analysis.
e. The executive team has set a contribution margin ratio goal of 20%. Will a 1% increase in the unit selling price achieve this goal? Additionally the executive team has asked you to determine the unit selling price that will achieve the contribution margin ratio goal of 20%. What is the unit selling price that you will report to the executive team? $
f. The sales manager is opposed to increasing the unit selling price. She believes that the number of units sold will drop if the unit selling price is increased. You have been asked to analyze the impact of decreasing variable expenses, rather than increasing unit selling price. In your spreadsheet, create a formula to determine the amount of unit variable expense at which the unit selling price is $400 and the contribution margin ratio is 20%. What is the unit variable expense that you report to the executive team (round to 2 decimal places)? $
g. The production manager then argues that a decrease in variable expenses can only be achieved by using lesser quality direct materials. This would have a negative impact on the product quality. The manager feels that the focus should be on reduction of fixed cost. Can a change in fixed costs impact the contribution margin ratio?
h. The executive team is also focusing on the break-even point in sales dollars. The team believes this break-even point needs to be decreased. Recalling your discussions with the sales manager and the production manager regarding unit selling price and variable expenses, you know that unit sales will drop if unit selling price is increased. Also a reduction in variable expenses would have a negative impact on quality. Therefore, in order to reduce the break-even point in sales dollars, you turn your attention to reducing. i. Keeping unit selling price at $400 and unit variable cost at $325, at what fixed cost amount will the break-even point in sales dollars be decreased to $224,000 (round to 2 decimal places)?
j. Additionally the executive team would like to know how a reduction of fixed expenses would impact the margin of safety. the impact on the margin of safety. What impact would a reduction of fixed expenses have on Whittier's risk of earning a loss rather than a profit?
k. What is the margin of safety when fixed costs are reduced to achieve the break-even point in sales dollars of $224,000? (take your answer for the amount of fixed costs from question part i, change the fixed costs amount on the contribution margin income statement spreadsheet above in question part a, if formulas are done correctly this will recalculate the margin of safety) (round to 2 decimal places). $