Brown Manufacturing Company Peter Johnson and Lily Brown own Brown Manufacturing
ID: 2559970 • Letter: B
Question
Brown Manufacturing Company Peter Johnson and Lily Brown own Brown Manufacturing Company (Brown). Brown produced storage sheds in three primary models (A, B., and C). The industry was dominated by Coleman, Phoenix, and Meco, which made several of types of sheds. Brown was a small player in the industry with a solid customer base and a profitable business over last few years. This year was a little different their profit was significantly lower than the prior years. The company's 2017 financials are provided in Exhibit 1 The company produces 3 products - let's call them Shed A, B and C for simplicity. The standard costs for these three products are provided in Exhibit 2. The Selling, general, and administrative (SG&A;), other costs, interest income, and interest expense are likely to remain the same no matter which product-line combinations the company produced The company is thinking about the future and has provided a preliminary proforma 2018 sales budget in Exhibit 3. Favorable preliminary 2018 forecasts lead management to believe there will be excess cash flow in 2018. Management has requested that a consultant be hired to provide an analysis of several proposed 2018 investments. The details of the proposed investments are provided in Exhibit 4 The company hires your services as their consultant. They believe that they can improve their bottom-line (net profits) by changing the product mix, pricing and advertising decisions Given that the plant currently runs at full capacity, examine the following independent scenarios 1. Calculate the current contribution margins of each product. 2. What is the effect of discontinuing Shed A? 3. Calculate the net change in profits if the company focuses more on selling Shed C instead of Shed A. Such an action would result in a decrease of 10,000 unit sales of Shed A and an increase of 10,000 unit sales of Shed C. 4. What is the effect if Shed C is decreased by $5 and the volume of Shed C increases by 10%? 5. Prepare a purchases and cash receipts budget for September, October, and November using the 2018 sales budget provided in Exhibit 3 6. Rank the proposed investments in Exhibit 4 using the net present value criteria and the accounting rate of return on initial investment. Assume the organization's cost of capital is 12%, which investment would you recommend?Explanation / Answer
1) Current contribution margins of each product
2) Effect of discontinuing shed A
For seeing the effect of discontinuing shed A, we reclaculate the net income without shed A.
The total revenue and cost of products sold will change as following:
The new income statement without shed A is given below:
Hence we see that the net income has decreased from $2500875 to $279500 which is a fall by 89%.
3) Effect on net income of increasing the sales of shed C by 10000 units and decreasing the sales of shed A by 10000 units.
New cost of products sold:
New Income statement
Net change if profits = new profit - old profit
= $55,44,500 - $25,00,875
= $30,43,625
4) Effect if the price of shed C decreases by $5 and volume increases by 10%.
New cost of products sold
New income statement
Change in net income = 5749250 - 2500875
= $32,48,375
The net income further increases as a result.
5) Prepare Purchases and cash receipts budget for Sep, Oct and Nov, 2018
Purchases budget
Sales budget
6) Ranking the projects on the basis of NPV
NPV of all the proposals is given below:
Proposal A
Proposal B
Proposal C
Ranking of proposals
Ranking on basis of ARR
We would recommend proposal A as it has the highest NPV.
A B C Selling price $142.5 $104.5 $76.0 Direct Variable cost $38.0 $26.0 $11.0 Indirect variable cost supplies $7.0 $2.0 $1.0 labour $5.0 $4.0 $2.0 Energy $6.0 $3.0 $2.0 Indirect variable cost $18.0 $9.0 $5.0 Contribution margin $86.5 $69.5 $60.0Related Questions
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