I don\'t need hel with the problem, I just need help writing a memo. Write a bus
ID: 2564096 • Letter: I
Question
I don't need hel with the problem, I just need help writing a memo.
Write a business memo (format is in the second document of this assignment) addressed to the president recommending the best course of action based on your analysis. In your memo, discuss changes in break-even points, and impacts to the operating leverage. Including a table summarizing your findings would be appropriate. The company’s long-range plan is to grow sales to 250,000 units in the next two to three years. In your memo, summarize the advantages and disadvantages of each of the alternatives. Critically evaluate the alternatives based on current market conditions and any impact each alternative may have on the long-range plan.
Clearly state your recommended course of action explaining why your recommendation is the best for the company.
Introduction: Having the ability to effectively communicate is one of the most important skills a business executive can possess. As French businesswoman and author Mirelle Guilliano has said, “Intelligence, knowledge or experience are important and might get you a job, but strong communication skills are what will get you promoted.” My own business experience supports this statement. By the time individuals have a few years of experience, they have great technical skills and can assemble, analyze, and categorize data to make solid business decisions. In the end, however, they are often unable to communicate the results of their analysis effectively. When I speak to senior executives and inquire about educational needs, the conversation invariably turns to communications. In accounting, by necessity, we focus on financial and quantitative data, but it is important to remember that as accountants we must be able to present the results of our analysis or studies to management. Through effective communications, accountants can truly impact business decisions and make their careers soar. The best way to get better at anything is to practice. That’s the basis for this assignment – to practice written communication.
Situation for Analysis: Grayslake Novelty produces and sells a small novelty item through tourist shops in Chicago and other northern Illinois locations. Last year the company sold 198,400 units. The income statement for Grayslake Novelty for last year is shown below:
Sales
$992,000
Less: Variable Expenses
545,600
Contribution Margin
446,400
Less: Fixed Costs
180,000
Net Operating Income
$266,400
While the company has been profitable, as shown in the above income statement, sales began falling near the end of last year and have continued to decline this year. There is concern that new competitors are beginning to take market share from Grayslake Novelty. As a result, Sarah Burroughs, the company president, has asked you to provide some information to assist her in making decisions about the company’s strategy for this product. These alternatives should be evaluated individually as stated. You are free to offer your own alternative based on any of the parameters given in the data.
Required:
a. While the company is currently profitable, the president wants to know the contribution margin and the breakeven in both units and dollars using last year’s level of sales. Additionally, compute the margin of safety, margin of safety ratio, and degree of operating leverage based on last year’s sales.
b. One of the possible strategies (Alt 1) is to reduce the current price by 8%. Using last year’s level of sales, what is the new contribution margin and break-even in units and dollars based on the price reduction? Additionally, compute the margin of safety, margin of safety ratio, and degree of operating leverage based on last year’s sales.
c. A second strategy (Alt 2) is to reduce the current variable cost by 0.20 per unit. The company has identified available efficiencies that can be implemented without any additional changes to the current cost. What is the new contribution margin and break-even in units and dollars based on the variable cost reduction of 0.20 per unit? Additionally, compute the margin of safety, margin of safety ratio, and degree of operating leverage based on last year’s sales.
d. A third strategy (Alt3) is to decrease the current price by 8% and reduce the variable cost per unit by 0.20. What is the new contribution margin and break-even in units and dollars based on making both changes? Additionally, compute the margin of safety, margin of safety ratio, and degree of operating leverage based on last year’s sales.
e. A fourth strategy (Alt 4) under consideration is to invest in more automated equipment for the manufacturing process. This investment will reduce variable costs by 0.65 per unit, primarily reducing the direct labor. At the same time, this will increase the fixed costs by $50,000. What is the new contribution margin and break-even in units and dollars based on this change in operating structure? Additionally, compute the margin of safety, margin of safety ratio, and degree of operating leverage based on last year’s sales.
f. A final strategy (Alt 5) is to change the current structure for the company’s sales person. The current fixed cost includes the salary of Grayslake’s one sales person at $60,000 per year. The company’s marketing study suggests that sales could be increased by 20% if the company hired an additional sales person; paid both individuals $40,000 fixed salaries; and a 0.25 commission per unit sold. What is the new contribution margin and break-even in units and dollars based on this change? Additionally, compute the margin of safety, margin of safety ratio, and degree of operating leverage based on last year’s sales as the starting point for this change.
Sales
$992,000
Less: Variable Expenses
545,600
Contribution Margin
446,400
Less: Fixed Costs
180,000
Net Operating Income
$266,400
Explanation / Answer
Dear President,
The computations of the relevant parameters are presented below for your perusal :
The recommended course of action should be alternative 2, which involves a reduction of variable expenses by $ 0.20 per unit. Not only does this aid in reduction of the break-even point in sales units, it also increases the net operating income from $ 266,400 to $ 306,080. The margin of safety ratio needless to say is the highest for this alternation at 62.97 %. Operating leverage is also the lowest , suggesting that operating risk is likewise likely to be lowest.
Current Alt 1 Alt 2 Alt 3 Alt 4 Alt 5 Sales $992,000 $912,640 $992,000 $912,640 $992,000 $1,190,400 Selling price per unit $ 5.00 $ 4.60 $ 5.00 $ 4.60 $ 5.00 $ 5.00 Variable expense per unit 2.75 2.75 2.55 2.55 2.10 3.00 Contribution margin per unit 2.25 1.85 2.45 2.05 2.90 2.00 Contribution Margin Ratio 0.45 0.40 0.49 0.45 0.58 0.40 Fixed Costs 180,000 180,000 180,000 180,000 230,000 200,000 Break-even sales units 80,000 97,297 73,469 87,805 79,310 100,000 Break-even sales dollars $ 400,000 $ 447,568 $ 367,347 $ 403,902 $ 396,552 $ 500,000 Margin of Safety in Units 118,400 101,103 124,931 110,595 119,090 158,080 Margin of Safety in Dollar Sales 592,000 465,072 624,653 508,738 595,448 690,400 Margin of Safety Ratio 59.68 % 50.96 % 62.97% 55.74 % 60 % 58 % Degree of Operating Leverage 1.68 1.96 1.59 1.84 1.67 1.72 Net Operating Income $ 266,400 $ 187,040 $ 306,080 $ 226,720 $ 186,640 $ 276,160Related Questions
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