Use Excel to show your work and include the formula in the cell to show how you

Question

Use Excel to show your work and include the formula in the cell to show how you arrived at your figures. Round percentages (example if 49.2, round to 49).

Background:

ABC, Inc., produces widgets. The company manufactures three levels of widgets-Economy, Better and Best. Selected information on the widgets is given below.

Economy

Better

Best

Selling price per widget

$40.00

$60.00

$90.00

Variable expense per widget production

$22.00

$27.00

$31.50

Selling (5% of selling price)

$2.00

$3.00

$4.50

All sales are made through the company’s own retail outlets. The widgets have the following fixed costs.

Per Month

Fixed production costs

$120,000

Advertising expense

100,000

Administrative salaries

   50,000

Total

$270,000

Sales, in units, over the past two months have been as follows:

Economy

Better

Best

Total

April

2,000

1,000

5,000

8,000

May

8,000

1,000

3,000

12,000

Required:

1. Prepare contribution format income statements for April and May. Place the fixed expenses only in the Total column. Do not show percentages for the fixed expenses.

Use the following headings:

Economy

Better

Best

Total

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Sales

Etc…

2. Upon seeing the income statements in (1) above, the president stated, “I can’t believe this! We sold 50% more widgets in May than in April, yet profits went down. It’s obvious that costs are out of control.” What other explanation can you give for the drop in net operating income?

3. Compute the widgets break-even point in dollar sales for April.

4. Without doing calculations, explain whether the break-even point would be higher or lower with May’s sales mix than with April’s sales mix.

5. Assume that sales of the Economy widgets increase by $20,000. What would be the effect on net operating income? What would be the effect if the Best widget sales increased by $20,000? Do not prepare income statements; use the incremental analysis approach in determining your answer.

Economy

Better

Best

Selling price per widget

$40.00

$60.00

$90.00

Variable expense per widget production

$22.00

$27.00

$31.50

Selling (5% of selling price)

$2.00

$3.00

$4.50

Explanation / Answer

1: Calculation of Contribution                                                        NOTE :ALL AMOUNTS ARE IN $ SIGN     

Note: Assumed Selling Expenses & Deducted from Selling price.

2 : Reasons for the drop in net operating income

3. :Calculation Break Even Point for the month of April   ($)                                   

BEP (Sales Volume) = Fixed Expenses/PV ratio  = 270,000/59.23% = $455,850

Calculation of PV Ration(Profit Volume Ratio)                               

  Pv Ratio= Contribution /Sales   = 332,000/560,500=59.23%       

  4 :.In the month of May is High because sales quantity is more than month of April & Sales price

      remail same for the both month .   

5 : Incremental Analysis    (  April month taken into consideration) = Amount in $

Conclusion : When Increment sales in case of "ECONOMY" & "Best" net operationg profit also incresed by $ 20,000 . There is same impact both the cases.                                          

Particular Economy Better Best Total Selling Price $40 $60 $90 Less- Selling Expes ($2) ($3) ($4.50) Net Selling Price 38 57 85.5 less: Variable Exps ($22) ($27) ($31.5) Contribution 16 30 54 Sales Unit in the month of April 2,000 1,000 5,000 Contribution in the month of April 32,000 30,000 270,000 332,000 less :Fixed Expenses (270,000) Profit in the month of April 62,000 Sales Units in the month of May 8,000 1,000 3,000 Contribution In the month of May 128,000 30,000 162,000 320,000 Less: Fixed Expenses 270,000 Profit in the month of May 50,000

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