Excel #2 Problem and Data CedarWorks manufactures playground equipment from Nort

Question

Excel #2

Problem and Data

CedarWorks manufactures playground equipment from Northern White Cedar wood which is free of all chemical additives and never splinters. The current manufacturing process is heavily labor intensive, so the company is studying ways to improve profits given that it currently has a significant amount of unused capacity. CedarWorks contribution margin income statement for the month of December 31, 2017 is given below:

           

                                                                                       Total                        Per Unit         

Sales                                                                $4,500,000      $3,000

            Variable expenses                                            3,150,000

            Contribution margin                                        1,350,000

            Fixed expenses                                                     900,000

            Net operating income                                      $ 450,000

What If #1:

1. The company is studying the effect on its financial statements of purchasing some new equipment which would allow it to automate a large portion of its operations. Since direct labor costs will decline, variable costs would decrease by $900.00 per unit. However, total fixed costs would increase by $2,250,000. The volume of sales is expected to increase by 600 units if the new equipment is purchased. If the company operates in an industry that is sensitive to changes in the economy, do you think CedarWorks should purchase the new equipment. Explain.       

What If #2:

2. As an alternative, rather than purchasing the new equipment, the president is thinking about changing the company’s marketing method. Under the new method, the president is proposing that CedarWorks pay its sales people a 5% commission on sales and decrease the monthly fixed salary by $420,000. Paying the sales force commissions is also expected to increase sales volume by 20% (or 300 units) each month. Do you agree with the president’s proposal? Explain.

What If #3:

3. Management is currently in contract negotiations with the labor union. If the negotiations fail and the company does not buy the equipment (part 1) or change the company’s marking method (part 2), direct labor costs will increase by 10% (or $90 per unit) and fixed costs will increase by $25,000 per month. If these costs increase, how many units will the company have to sell to earn a profit of $1,000,000.

$    ?

Excel #2

Problem and Data

CedarWorks manufactures playground equipment from Northern White Cedar wood which is free of all chemical additives and never splinters. The current manufacturing process is heavily labor intensive, so the company is studying ways to improve profits given that it currently has a significant amount of unused capacity. CedarWorks contribution margin income statement for the month of December 31, 2017 is given below:

           

                                                                                       Total                        Per Unit         

Sales                                                                $4,500,000      $3,000

            Variable expenses                                            3,150,000

            Contribution margin                                        1,350,000

            Fixed expenses                                                     900,000

            Net operating income                                      $ 450,000

What If #1:

1. The company is studying the effect on its financial statements of purchasing some new equipment which would allow it to automate a large portion of its operations. Since direct labor costs will decline, variable costs would decrease by $900.00 per unit. However, total fixed costs would increase by $2,250,000. The volume of sales is expected to increase by 600 units if the new equipment is purchased. If the company operates in an industry that is sensitive to changes in the economy, do you think CedarWorks should purchase the new equipment. Explain.       

What If #2:

2. As an alternative, rather than purchasing the new equipment, the president is thinking about changing the company’s marketing method. Under the new method, the president is proposing that CedarWorks pay its sales people a 5% commission on sales and decrease the monthly fixed salary by $420,000. Paying the sales force commissions is also expected to increase sales volume by 20% (or 300 units) each month. Do you agree with the president’s proposal? Explain.

What If #3:

3. Management is currently in contract negotiations with the labor union. If the negotiations fail and the company does not buy the equipment (part 1) or change the company’s marking method (part 2), direct labor costs will increase by 10% (or $90 per unit) and fixed costs will increase by $25,000 per month. If these costs increase, how many units will the company have to sell to earn a profit of $1,000,000.

Original Data What If #1 What If #2 What If #3 Units Units Units Units Last Year 1,500 Proposed: ? Proposed: ? Proposed: ? Total Per Unit Total Per Unit Total Per Unit Total Per Unit Sales $4,500,000 3,000.00 $   ? $         ? $   ? $         ? $   ? $         ? Less variable expenses 3,150,000 2,100.00       ? ?       ? ?       ? ? Contribution margin 1,350,000 900.00       ? $         ?       ? $         ?       ? $         ? Less fixed expenses 900,000       ?       ?       ? Net income $450,000 $   ? $   ? $   ? Contribution Margin Ratio 30%      ? 0%      ? 0%      ? 0% Breakeven point in Dollars $3,000,000 $   ? $   ? $   ? Breakeven Point in Units 1,000       ?       ?       ? $1,500,000 $   ? $   ? $   ? Margin of Safety Operating Leverage $3 ? 0.0 ? 0.1 ? 0.1 Increase (Decrease) in NOI after proposed changes: #VALUE!

$    ?

$    ?

Explanation / Answer

Answer

Original Data

What if #1

What if #2

What if #3

Units

Units

Units

Units

Last Year

1,500

Proposed:

2100

Proposed:

1800

Proposed:

2377

Working Column

Total $

Per Unit $

Total $

Per Unit $

Total $

Per Unit $

Total $

Per Unit $

A

Sales

4500000

3000

6300000

3000

5400000

3000

7131000

3000

B

Less variable expenses

3150000

2100

2520000

1200

4050000

2250

5205630

2190

C=A-B

Contribution margin

1350000

900

3780000

1800

1350000

750

1925370

810

D

Less fixed expenses

900000

3150000

480000

925000

E=C-D

Net income

450000

630000

870000

1000370

F=C/A

Contribution Margin Ratio

30%

60%

25%

27%

G=D/F

Breakeven point in Dollars

3000000

5250000

1920000

3425926

H=G/sale price per unit

Breakeven Point in Units

1000

1750

640

1141.975

I=A-G

Margin of Safety

1500000

1050000

3480000

3705074

J=C/E

Operating Leverage

3

6

1.55172414

1.924658

Increase (Decrease) in NOI after proposed changes:

$180000

$420000

$550370

Original Data

What if #1

What if #2

What if #3

Units

Units

Units

Units

Last Year

1,500

Proposed:

2100

Proposed:

1800

Proposed:

2377

Working Column

Total $

Per Unit $

Total $

Per Unit $

Total $

Per Unit $

Total $

Per Unit $

A

Sales

4500000

3000

6300000

3000

5400000

3000

7131000

3000

B

Less variable expenses

3150000

2100

2520000

1200

4050000

2250

5205630

2190

C=A-B

Contribution margin

1350000

900

3780000

1800

1350000

750

1925370

810

D

Less fixed expenses

900000

3150000

480000

925000

E=C-D

Net income

450000

630000

870000

1000370

F=C/A

Contribution Margin Ratio

30%

60%

25%

27%

G=D/F

Breakeven point in Dollars

3000000

5250000

1920000

3425926

H=G/sale price per unit

Breakeven Point in Units

1000

1750

640

1141.975

I=A-G

Margin of Safety

1500000

1050000

3480000

3705074

J=C/E

Operating Leverage

3

6

1.55172414

1.924658

Increase (Decrease) in NOI after proposed changes:

$180000

$420000

$550370

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