Baby Center Ltd. Baby Center Ltd. makes portable high chairs. The high chair is

Question

Baby Center Ltd. Baby Center Ltd. makes portable high chairs. The high chair is generally marketed through exclusive retailers located in upscale shopping malls. In late 2017, Diana Suarez, the president of the company, was considering an alternative marketing plan for 2018 that was presented to her by Bill Duffy, the marketing manager. Based on sales from January through October 2017, Diana expected that 2018 sales would amount to 30,000 units Bill's alternative marketing plan is presented below: 2018 Marketing Plan: "At the present time, we sell the product to retailers for $58.00 per high chair. Retailers generally charge the consumers between $64.99 and $69.99. If we cut our selling price to retailers to $56.00, I expect that the product will do much better. Their increased markup will give them the incentive to display our product more prominently and to promote it more vigorously to customers. We should support this strategy by supplying more promotional materials to retailers, which I expect would be an increase of $5,000 in Advertising and Promotion costs. Based on the price cut and the increase in advertising and promotion, I expect that we will be able to boost our sales volume by 25 percent to 37,500 units in 2018. Diana received cost data from the company's CFO, Don Capp. Don expects that the cost data below are also reliable estimates for 2018 for a production volume up to 40,000 units. Beyond 40,000 units, the company would have to rent additional machines (with a capacity of 10,000 units each), which would increase fixed manufacturing overhead costs by $8,000 per machine 2017 Cost Data Manufacturing Costs for high chairs (based on production volume of 30,000 units): Direct Materials Direct Labor Packaging Variable Manufacturing Overhead $2.50 per unit Fixed Manufacturing Overhead $140,000 $22 per unit $16 per hour (each worker can make 2 units in 1 hour) $3 per unit Selling and Administrative Costs for high chairs (based on sales volume of 30,000 units): Sales Commissions Shipping Costs Advertising and Promotion (fixed) $15,000 Fixed Selling and Admin Expenses $12,000 $5.80 per unit $4.00 per unit

Explanation / Answer

Requirement 1 Baby Center Ltd. CVP Income statement For the year ended December 31, 2017 Total Per unit Sales 1740000 58 Variable costs Direct Materials 660000 22 Direct Labor 240000 8 Packaging 90000 3 Variable Manufacturing Overhead 75000 2.5 Sales Commissions 174000 5.8 Shipping Costs 120000 4 Total Variable Costs 1359000 45.3 Contribution Margin 381000 12.7 Fixed Costs Fixed Manufacturing Overhead 140000 Advertising & Promotion 15000 Fixed Selling & Admin expenses 12000 Total Fixed Costs 167000 Operating Income 214000 Requirement 2 2017 break even point in number of high chairs for the company. Break Even Points(units) = Total Fixed Costs/Contribution Margin per unit = 167000/12.7 = 13149.61 Requirement 3 Baby Center Ltd. CVP Income statement For the year ended December 31, 2018 Total Per unit Sales 2100000 56 Variable costs Direct Materials 825000 22 Direct Labor 300000 8 Packaging 112500 3 Variable Manufacturing Overhead 93750 2.5 Sales Commissions 217500 5.8 Shipping Costs 150000 4 Total Variable Costs 1698750 45.3 Contribution Margin 401250 10.7 Fixed Costs Fixed Manufacturing Overhead 140000 Advertising & Promotion 20000 Fixed Selling & Admin expenses 12000 Total Fixed Costs 172000 Operating Income 229250

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