Greencorn corporation (GC) manufactures car batteries in rural Nova Scotia. GC i
ID: 2418682 • Letter: G
Question
Greencorn corporation (GC) manufactures car batteries in rural Nova Scotia. GC is the largest employer in the area and many of the retailers and services providers in the area are dependent on the wages paid by GC. The batteries that GC produces are currently sold to auto manufacturers and retailers by a network of independent sales agents located in the United States and Canada The sales agents are currently paid a 20% commission on sales, and this commission rate was used when GC's management prepared the following budgeted income statement for the upcoming year: Since the completion of the above statement. GC's management has learned that the its factory workers (direct labour) are demanding a 5% increase in wages which will increase GC's variable cost of goods sold to 58% of revenue. Many of these employees have been with GC for decades. GC has the option of acquiring a new production machine at an annual lease cost of $1,000,000 plus a fixed annual maintenance contract of $150,000. This new machine would reduce the number of factory workers by 25% with a corresponding reduction in the variable costs of goods sold to 48% of revenue. Assuming sales of $15.000,000, construct a budgeted contribution format income statement for the upcoming year for each of the following alternatives: No change in workers' salaries An increase in wages and Cost of Goods Sold as described above The introduction of the new machine with the decrease in Cost of Goods Sold as described above Calculate GC's break-even point in sales dollars for the upcoming year for each of the alternatives. Calculate the sales (in dollars) required to achieve and operating income of $200,000 for each of the alternatives. Determine the volume of sales at which operating income would be equal regardless of whether GC continues with its current work force (at the new wage rate) or acquires the new production machine. Provide proof for your answer Write a memo (150 to 400 words) to the president of GC in which you recommend whether the company should continue to use its current workforce (at the new higher rate) or acquire the new production machine. Your memo should reference the point of indifference and consider any ethical or human resource issues with regards to your recommendation.Explanation / Answer
Solution.
1. a.
b.
c.
* 15,000,000 x 48% = $7,200,000 + $100,000 of lease = $7,300,000
2.
Calculation of break even sales.
Formula = Total fixed expense / contribution margin.
a. $,3400,000 / 24% = $1,416,666.66
b. $,3400,000 / 22% = 15,454,545.45
c. $3,550,000 / 31.33% = $11,330,992.65
3.
Particulars Amount Amount Sales 15,000,000 Variable Production Expensse 8,400,000 Variable selling and admin. Expenses 3,000,000 11,400,000 Contribution margin 3,600,000 Fixed production expense 1,400,000 Fixed sellinf and admin expense. 2,000,000 3,400,000 Net profit 200,000Related Questions
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