The project requires the comparison of two competing proposals. Only one will be
ID: 2583382 • Letter: T
Question
The project requires the comparison of two competing proposals. Only one will be selected. The details of the proposals are as follows:
1. The Production Manager wants to invest $250,000 into new manufacturing equipment that will improve the efficiency and quality of the production process. The production manager has been pushing for this investment for months and has stated that the variable manufacturing cost of the product will decrease by $10 per unit. The investment will cause an increase in the fixed manufacturing costs in the form of annual depreciation expense of $50,000 on the new equipment.
The accounting numbers are as follows:
i. Decrease in Variable cost of $10 per unit
ii. Increase to annual Fixed cost of $50,000
2. The Sales Manager wants to implement a 3 year marketing campaign at a total cost of $150,000 ($50,000 annually for 3 years) and to decrease the selling price of the product by $13 dollars. He guarantees this will increase sales units by 25%.
The accounting numbers are as follows:
i. Decrease in Selling price per unit of $13
ii. Increase in annual marketing expense (fixed cost) of $50,000
iii. Increase in sales units by 25% (at the new lower per unit selling price)
You will need to complete a Contribution Margin Report based on the current revenue and expenses and also one for each of the proposals. In addition to the Contribution Margin Report you will also need to include the following calculations for the current and for each of the proposals: The Breakeven point in sales units and dollars, the margin of safety in dollars and percentage. For the analysis of the two proposals ignore the net present value of cash flows.
After you have completed your analysis you will need to make your recommendation on the course of action that will be the most advantageous to the company. Be complete in your analysis and prepare a memo to your boss Sally outlining your findings and provide support for your recommendation. [Be sure to include “all” of the information that the data is providing.]
Student Name:
Manning Enterprises
Set up a Contribution Margin Statement for Product A to use for your analysis
You gathered the following per unit information from the Company's accounting system for Product A:
Unit Sales 5,344
Sales Price per Unit $225.00
Variable Cost per unit $137.00
Total Traceable Fixed Cost $357,245.00
Using the above data prepare a current contribution margin report and a Forecasted contribution margin report (one for each of the proposals reflecting each of their proposed changes). You use a template that you kept from when you took Managerial Accounting . You saved all of the templates you used in Managerial Accounting because you knew someday you would need them!
Production Propsal
Current Per Unit % of Sales Current Proposed per Unit % of Sales Forecasted based on Proposal Difference
Units Sold
Sales
Variable Cost
Contribution Margin
Traceable Fixed Cost
Profit (Loss)
Sales Proposal
Current Per Unit % of Sales Current Proposed per Unit % of Sales Forecasted based on Proposal Difference
Units Sold
Sales
Variable Cost
Contribution Margin
Traceable Fixed Cost
Profit (Loss)
Current
Breakeven in Sales Units ______
Breakeven in Sales Dollars ______
Margin of Safety in sales dollars _____
Margin of Safety %
Production Propsal
Breakeven in Sales Units _______
Breakeven in Sales Dollars _____
Margin of Safety in sales dollars ______
Margin of Safety %
Sales Proposal
Breakeven in Sales Units ______
Breakeven in Sales Dollars _____
Margin of Safety in sales dollars ______
Margin of Safety % ______
Explanation / Answer
Production Propsal Current Per Unit % Sale Current Proposed per unit % Sale Forcast based on Proposal Units Sold 5344 5344 Sales 225 100 1202400 225 100 1202400 Variable Cost 137-10 under proposed 137 60.89 732128 127 56.44 678688 Contribution Margin 88 39.11 470272 98 43.56 523712 Traceable Fixed Cost 357245+50000 under proposed 66.85 29.71 357245 76.21 33.87 407245 Profit (Loss) 21.15 9.40 113027 21.79 9.69 116467 Sales Proposal Current Per Unit % Sale Current Proposed per unit % Sale Forcast based on Proposal Units Sold ( 5344*125% under proposed) 5344 6680 Sales (225-13 under proposed) 225 100 1202400 212 100 1416160 Variable Cost 137 60.89 732128 137 64.62 915160 Contribution Margin 88 39.11 470272 75 35.38 501000 Traceable Fixed Cost 357245+50000 under proposed 66.85 29.71 357245 60.96 28.76 407245 Profit (Loss) 21.15 9.40 113027 14.04 6.62 93755 Current Breakeven in Sales Units ______ 4,060.00 Breakeven in Sales Dollars ______ $913,410.50 Margin of Safety in sales dollars _____ $288,989.50 Margin of Safety % 24.03% Production Propsal Breakeven in Sales Units _______ 4,156.00 Breakeven in Sales Dollars _____ $935,001.00 Margin of Safety in sales dollars ______ $267,398.70 Margin of Safety % 22,24% Sales Proposal Breakeven in Sales Units ______ 5430 Breakeven in Sales Dollars _____ $151,146 Margin of Safety in sales dollars ______ $254,014 Margin of Safety % ______ 18.71%
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