B&L; Landscapes, Inc. Mini Practice Part 4 Bill Graham and Lary Miller incorpora
ID: 2574942 • Letter: B
Question
B&L; Landscapes, Inc. Mini Practice Part 4 Bill Graham and Lary Miller incorporated B&L; Landscapes, Inc. on July 1, 2016. The business consists of lawn care and sprinkler system installations. In addition, they also sell two types of fertilizer During 2017, B&L; Landscapes, Inc. acquired a 30% interest in Crestline Pipe. The president of Crestline has been expressing concern about the profitability of the company. Bill and Larry want to help and have volunteered your services to provide some managerial reporting for Crestline Crestline Pipe distributes high-quality ¾ inch PVC pipe that sells for $3.00 per linear foot unit. Variable costs are $0.90 per unit, and fixed costs total 27,000 per year Assume that the operating results for last year were Less variable expenses. _18,000 Contribution margin42,000 Less fixed expenses7,000 Net operating income. $_15.000 Instructions: Answer the following independent questions 1. What is the product's contribution margin? What is the product's CM ratio? 2. Use the contribution margin to determine the break-even point in sales units (round to whole units). Use the CM ratio to determine the break-even point in sales dollars (round to whole dollars) 3. What is the margin of safety in dollars and units for Crestline Pipe? 4. Due to an increase in demand, the company estimates that sales will increase by $20,000 this year. By how much should net operating income increase (or net operating loss decrease), assuming that fixed costs do not change? 5. The president expects sales to increase by 25% this year. If sales do increase by 25%, how much could fixed costs increase and still maintain net operating income of $15,000? 6. The president would like to reduce the sales price of the pipe to $2.70 per linear foot unit and increase advertising by $3,000. Using the CM method, what is the breakeven point in units with these changes (round to whole units)? How many units would Crestline have to sell to maintain a net operating income of at least $15,000 (round to whole units)? Prepare your answers in a memorandum to the President of Crestline Pipe. Be sure to show all your work and identify your calculations and your solutions clearly. Remember this report is going to a non-accountant, so be sure to include some explanation of what the numbers meanExplanation / Answer
Answer 1.
Selling Price = $3.00
Variable Costs per unit = $0.90
Contribution Margin per unit = Selling Price - Variable Costs per unit
Contribution Margin per unit = $3.00 - $0.90
Contribution Margin per unit = $2.10
Contribution Margin Ratio = Contribution Margin per unit / Selling Price
Contribution Margin Ratio = $2.10 / $3.00
Contribution Margin Ratio = 70%
Answer 2.
Break-even point in sales units = Fixed Costs / Contribution Margin per unit
Break-even point in sales units = $27,000 / $2.10
Break-even point in sales units = 12,857
Break-even point in sales dollars = Fixed Costs / Contribution Margin Ratio
Break-even point in sales dollars = $27,000 / 0.70
Break-even point in sales dollars = $38,571
Answer 3.
Margin of Safety in dollars = Sales - Break-even point in sales dollars
Margin of Safety in dollars = $60,000 - $38,571
Margin of Safety in dollars = $21,429
Margin of Safety in units = Units Sold - Break-even point in sales units
Margin of Safety in units = 20,000 - 12,857
Margin of Safety in units = 7,143
Answer 4.
Increase in Sales = $20,000
Increase in Net Operating Income = Increase in Sales * Contribution Margin Ratio
Increase in Net Operating Income = $20,000 * 70%
Increase in Net Operating Income = $14,000
Answer 5.
Increase in Sales = 25%
Increase in Sales = 25% * $60,000
Increase in Sales = $15,000
Net operating income will remain same, if and if increase in contribution is equal to increase in fixed costs.
Increase in Contribution Margin = Increase in Sales * Contribution Margin Ratio
Increase in Contribution Margin = $15,000 * 70%
Increase in Contribution Margin = $10,500
Increase in Fixed Costs = Increase in Contribution Margin
Increase in Fixed Costs = $10,500
Answer 6.
Selling Price = $2.70
Variable Costs = $0.90
Fixed Costs = $27,000 + $3,000
Fixed Costs = $30,000
Contribution Margin per unit = Selling Price - Variable Costs per unit
Contribution Margin per unit = $2.70 - $0.90
Contribution Margin per unit = $1.80
Break-even point in sales units = Fixed Costs / Contribution Margin per unit
Break-even point in sales units = $30,000 / $1.80
Break-even point in sales units = 16,667
Desired Net Operating Income = $15,000
Required unit sales = (Fixed Costs + Desired Net Operating Income) / Contribution Margin per unit
Required unit sales = ($30,000 + $15,000) / $1.80
Required unit sales = 25,000
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