B&L Landscapes, Inc. Mini Practice Part 4 Bill Graham and Larry Miller incorpora
ID: 2468509 • Letter: B
Question
B&L Landscapes, Inc. Mini Practice Part 4
Bill Graham and Larry Miller incorporated B&L Landscapes, Inc. on July 1, 2014. The business consists of lawn care and sprinkler system installations. In addition, they also sell two types of fertilizer.
During 2015, B&L Landscapes, Inc. acquired a 30% interest in Crestline Pipe. The president of Crestline has been expressing concern about the profitability of the company. Bill and Larry want to help and have volunteered your services to provide some managerial reporting for Crestline.
Crestline Pipe distributes high-quality ¾ inch PVC pipe that sells for $3.00 per linear foot unit. Variable costs are $1.05 per unit, and fixed costs total 27,000 per year. Assume that the operating results for last year were: Sales $60,000 Less variable expenses 21,000 Contribution margin 39,000 Less fixed expenses 27,000 Net operating income $ 12,000
Assume that the operating results for last year were:
Sales.....................................................................................................
$60,000
Less variable expenses.....................................................................
21,000
Contribution margin..........................................................................
39,000
Less fixed expenses............................................................................
27,000
Net operating income......................................................................
$ 12,000
Instructions:
Answer the following independent questions:
1. What is the product’s contribution margin? What is the product’s CM ratio?
2. Use the contribution margin to determine the break-even point in sales units (round to whole units). Use the CM ratio to determine the break-even point in sales dollars (round to whole dollars).
3. What is the margin of safety in dollars and units for Crestline Pipe?
4. Due to an increase in demand, the company estimates that sales will increase by $20,000 this year. By how much should net operating income increase (or net operating loss decrease), assuming that fixed costs do not change?
5. The president expects sales to increase by 25% this year. If sales do increase by 25%, how much could fixed costs increase and still maintain net operating income of $12,000?
6. The president would like to reduce the sales price of the pipe to $2.70 per linear foot unit and increase advertising by $3,000. Using the CM method, what is the breakeven point in units with these changes (round to whole units)? How many units would Crestline have to sell to maintain a net operating income of at least $12,000 (round to whole units)?
Prepare your answers in a memo to the President of Crestline Pipe. Be sure to show all your work and identify your calculations and your solutions clearly. Remember this report is going to a non-accountant, so be sure to include some explanation of what the numbers mean.
Sales.....................................................................................................
$60,000
Less variable expenses.....................................................................
21,000
Contribution margin..........................................................................
39,000
Less fixed expenses............................................................................
27,000
Net operating income......................................................................
$ 12,000
Explanation / Answer
1.
Contribution margin = Selling price – Variable costs = $3 - $1.05 = $1.95 per linear foot unit
CM ratio = Contribution margin / Selling price = $1.95/$3 = 65%
2.
Break even point in sales dollars = Fixed expenses / CM ratio = $27,000/65% = $41,538
3.
Margin of safety in dollars = Sales in dollars – Breakeven sales in dollars = $60,000 - $41,538 = $18,462
Margin of safety in units = Margin of safety in dollars/Selling price per unit = $18,462/$3 = 6,154 linear foot units
4.
If fixed costs do not change then net operating income shall increase by the amount of contribution margin.
Increase in net operating income = Increase in sales * CM ratio = $20,000 * 65% = $13,000
5.
If sales increase by 25%, contribution margin shall also increase by 25%.
Revised contribution margin = $39,000 * 125% = $48,750
Required net operating income = $12,000
Revised fixed costs = Revised contribution margin – Required net operating income = $48,750 - $12,000 = $36,750
Increase in fixed costs = $36,750 - $27,000 = $9,750
Hence fixed costs shall decrease by $2,250 to maintain the same net operating income
6.
Reduced selling price = $2.70
Contribution margin = $2.70 - $1.05 = $1.65 per unit
Fixed costs = $27,000 + $3,000 = $30,000
Breakeven point in units = Fixed costs / Contribution margin per unit = $30,000 / $1.65 = 18,182 linear foot units
Required contribution margin = Net operating income + Fixed costs = $12,000 + $30,000 = $42,000
Units to be sold = $42,000/$1.65 = 25,455 linear foot units
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