Cvp analysis :profit planning; Horton Manufacturing Inc. (HMI) is suffering from

ID: 2543689 • Letter: C

Question

Cvp analysis :profit planning; Horton Manufacturing Inc. (HMI) is suffering from the effects of increased local and global competition for its main product, a lawn mower that is sold in discount stores throughout the Unitedstates. The following table shows the results of HMI's operations for 2016.

sales (12,500 units @84) 1,050,000

less variable costs(12,500@$63) 787,500

contribution margin 262,500

less:fixed costs 296,000

operating profit (loss) ($33,500)

Required:

1. Compute HMI's breakeven point in both units and dollars. Also , compute the contrubution margin ration. (note round the number of break even units to a whole number)

2.) What would be the required sales in units and in dollars, to generate a pretax profit of 30,000

3.) Assume a combined income tax rate of 40%. What would be the required sales volume, in both units and in dollars, to generate an after tax profit of 30,000( round number of units up to a whole number )

4.) Prepare a contribution income as a check for your calculations in requirement 3 above.

5.) The manager belives that a 60,000 increase in advertising would result inn a 200,000 increase in annual sales. If the manager is right , what will be the effect on the company's operating profits or loss?

6.) Refer to the original data . The vice president in charge of sales feels that a 10% reduction in price in combination with a 40,000 increase in advertising will cause unit sales to increase by 25%. What effect would this strategy have on operating profit (loss)?

7.) Refer to the original data. During 2016, HMI saved $5 of unit varible costs per lawn mower by buying from a different manufacturer. However the cost of the changing the plant machinery to accomodate the new part cost an aditional 50,000 in fixed cost per year. Was this a wise change? Why or why not?

Explanation / Answer

Profit Margin = Net profit /Net sales = $ 764,440/$ 14,720,000 = 0.051932065 or 5.19 %

Asset Turnover = Net sales /Average total assets = $ 14,720,000/ [($ 6,512,581 + $ 5,913,433S)/2]

= $ 14,720,000/ ($ 12,426,014/2)

= $ 14,720,000/ $ 6,213,007 = 2.369223148 or 2.37

Return on Investment (ROI) = Net Profit / Average total assets = $ 764,440/$ 6,213,007

= 0.123038651 or 12.3 %

Average operating assets of the department = [($ 238,503 +682,420 + 1,985,683 +10,593 +3,902

+ 2,509,441) + ($ 218,049 + 702,497 + 1,846,224 + 12099 + 3,621 + 2,049,950)]/2

= $ 5,430,542 + $ 4,877,440 = $ 10,307,982/2 = $ 5,153,991

Residual income = Department’s Net operating income – (Minimum required return x Average operating assets of the department)

Residual income = $ 1,131,952 – (15 % x $ 5,153,991)

= $ 1,131,952 – (0.15 x $ 5,153,991)

= $ 1,131,952 - $ 773,098.65 = $ 358,853.35

*******Answered first four questions.

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Contribution Margin Ratio = Contribution Margin/sales

= $ 262,500 /1,050,000 = 0.25 or 25 %

Contribution Margin per unit = Total contribution/No. of units = $ 262,500 /12,500 = $ 21

Breakeven point in unit sales = Fixed cost /Contribution Margin per unit

= $ 296,000/ $ 21 = 14,095.24 or 14,095 units

Breakeven point in dollar sales = Fixed cost /Contribution Margin ratio

= $ 296,000/ 0.25 = $ 1,184,000

Profit = (Unit contribution margin x no. of unit sales) – fixed cost

$ 30,000 = ($ 21 x no. of unit sales) - $ 296,000

$ 21 x no. of unit sales = $ 30,000 + $ 296,000

No. of unit sales = $ 326,000/$ 21 = 15,523.81 or 15,524 units

Sales dollar required = 15,523.81 x $ 84 = $1,304,000

After tax income = before tax income x (1 - tax rate)

$ 30,000 = before tax income x (1 – 0.4)

= before tax income x 0.6

Before tax income = $ 30,000/0.6 = $ 50,000

Profit = (Unit contribution margin x no. of unit sales) – fixed cost

$ 50,000 = ($ 21 x no. of unit sales) - $ 296,000

$ 21 x no. of unit sales = $ 50,000 + $ 296,000

No. of unit sales = $ 346,000/$ 21 = 16,476.19 or 16,477 units

Sales dollar required = 16,477 x $ 84 = $ 1,384,068

Sales (16,477 x $ 84)

$ 1,384,068

Less: variable cost (16,477 x $ 63)

$ 1,038,051

Contribution margin

$ 346,017

Less: fixed cost

$ 296,000

Operating profit

$ 50,017

****Answered first four questions.