The owners of Katy EH Manufacturing, a small manufacturer of gas grills, have pr
ID: 2456355 • Letter: T
Question
The owners of Katy EH Manufacturing, a small manufacturer of gas grills, have prepared a preliminary budget for the upcoming year and would like to assess the financial impact of several alternative scenarios, including dropping a product; changing the price on a product, with a resulting increase in volume; and shifting advertising focus, with a resulting shift in volume from one product to another. A new budget must be prepared. At year-end, the actual results are better than had been planned, but not necessarily better than what should have been, given actual sales volumes.
Hint Consider using the topic of contribution analysis as an easy way to analyze profit-planning issues such as adding or dropping a product or service; changing a price; adding or decreasing expected volumes; or preparing a profit budget. In this particular situation, there are three products, each with different proportions of variable and fixed costs. Make sure you can identify variable and fix costs. Pay attention to the relation of profit and contribution margin. In addition, you also need to consider non-financial factors prior to make your decision.
Required :
e) Prepare a revised 2016 profit budget assuming the owners chose Option 2 – lowering the price of Grill C to $75 and expecting sales volume of that grill to increase to 220,000 units.
f) The actual results for 2016 are shown in Exhibits3-4. Was 2016 net income more or less than what should have been expected given these actual volumes and prices? If the results were different, why .
Exhibit 1: Operating Budget 2016: Draft 12/18/2015
Sales
$41,200,000
Less: cost of products sold
22,800,000
Gross margin
$18,400,000
SG&A
9,350,000
Other costs
2,100,000
Operating income
$6,950,000
Less: Interest expense
420,000
Plus: Interest income
150,000
Income before tax
$6,680,000
Income taxes
2,338,000
Net income
$4,342,000
Exhibit 2: Operating Budget 2016: Draft 12/18/2008
Grill A
Grill B
Grill C
Notes
Planned units
80,000
120,000
200,000
Per unit
Sales price
$150
$110
$80
Direct costs:
Materials
17
10
7
directly related to volume
Labor
21
16
4
directly related to volume
Subtotal
$38
$26
$11
Indirect cost:
Supplies
7
2
1
directly related to volume
Labor
10
8
4
one-half varies with direct labor, the rest is fixed
Supervision
8
3
1
unrelated to volume
Energy
12
6
4
one-half varies with direct labor, the rest is fixed
Depreciation
22
7
5
unrelated to volume
Support*
12
6
3
unrelated to volume
All other
11
2
1
unrelated to volume
Subtotal
$82
$34
$19
Total cost
$120
$60
$30
Profitability
$30
$50
$50
*This category comprises accounting, IT, human resources, legal, and others supporting the production of these products.
Exhibit 3: Actual 2016 Volume & Price
Grill A
Grill B
Grill C
Price
$150
$110
$75
Volume
115,000
110,000
225,000
Exhibit 4: 2016 Operating Results: Draft 1/19/2017
Revenue
$46,225,000
Variable costs:
Materials
4,800,000
Direct labor
5,200,000
Supplies
1,300,000
Indirect labor
1,500,000
Energy
1,600,000
Total variable cost
$14,400,000
Fixed costs
Indirect labor
1,300,000
Supervision
1,200,000
Energy
Total variable cost
$14,400,000
Fixed costs
Indirect labor
1,300,000
Supervision
1,200,000
Energy
1,350,000
Depreciation
3,660,000
Support
2,300,000
All other
1,380,000
Total fixed cost
$11,190,000
Total cost
$25,590,000
Gross margin
$20,635,000
SG&A
9,350,000
Other costs
2,100,000
Operating income
$9,185,000
Less: interest expense
420,000
Plus: interest income
150,000
Income before tax
$8,915,000
Income taxes
3,120,250
Net income
$5,794,750
1,350,000
Sales
$41,200,000
Less: cost of products sold
22,800,000
Gross margin
$18,400,000
SG&A
9,350,000
Other costs
2,100,000
Operating income
$6,950,000
Less: Interest expense
420,000
Plus: Interest income
150,000
Income before tax
$6,680,000
Income taxes
2,338,000
Net income
$4,342,000
Explanation / Answer
Grill a Grill B Grill C Budget Grill A Planned units 80,000 120,000 200,000 220000 r unit Sales price $150 $110 $80 75$ Direct costs: Materials 17 10 7 7 Labor 21 16 4 4 Subtotal $38 $26 $11 $11 Indirect cost: Supplies 7 2 1 1 Labor 10 8 4 4 Supervision 8 3 1 1 Energy 12 6 4 4 Depreciation 22 7 5 5 Support* 12 6 3 3 All other 11 2 1 1 Subtotal $82 $34 $19 $19 Total cost $120 $60 $30 $30 Profitability $30 $50 $50 $50 Grill A Grill B Grill C Price $150 $110 $75 Volume 115,000 110,000 225,000 Revenue $46,225,000 Variable costs: Materials 4,800,000 Direct labor 5,200,000 Supplies 1,300,000 Indirect labor 1,500,000 Energy 1,600,000 Total variable cost $14,400,000 Fixed costs Indirect labor 1,300,000 Supervision 1,200,000 Energy 1,350,000 riable cost $14,400,000 Fixed costs Indirect labor 1,300,000 Supervision 1,200,000 Energy 1,350,000 Depreciation 3,660,000 Support 2,300,000 All other 1,380,000 Total fixed cost $11,190,000 Total cost $25,590,000 Gross margin $20,635,000 SG&A 9,350,000 Other costs 2,100,000 Operating income $9,185,000 Less: interest expense 420,000 Plus: interest income 150,000 Income before tax $8,915,000 Income taxes 3,120,250 Net income $5,794,750
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