The project requires the comparison of two competing proposals Only one will-be
ID: 2588741 • 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,4 Increase in annual marketing expense (fixed cost) of SS0,000T 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.] Use the tab in the excel workbook marked Analysis of Proposals for your onalysis. Use the Word document Memo to Saily for your report to your boss.Explanation / Answer
current structure Production Proposal Current per unit % of Sales Current Proposed per unit % of Sales Forcasted based on Proposal Unit sold 5344 5344 Sales 225 100 1202400 225 100 1202400 Variable cost 137 60.89 732128 127 56.44 678688 Contribution margin 88 39.11 470272 98 43.56 523712 Fixed cost 357245 407245 Profi(Loss) 113027 116467 current structure Sales Proposal Current per unit % of Sales Current Proposed per unit % of Sales Forcasted based on Proposal Unit sold 5344 6680 Sales 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 Fixed cost 357245 407245 Profi(Loss) 113027 93755 Current Break even sales in units 4060 A Fixed cost/Contribution margin per unit Break even sales in dollars 913410.51 B A*selling price per unit Margin of safety in sales dollars 288989.49 C existing sales-breakeven sales Margin of safety % 24.03 D C/existing sales% Production Proposal Break even sales in units 4156 A Fixed cost/Contribution margin per unit Break even sales in dollars 880978.98 B A*selling price per unit Margin of safety in sales dollars 321421.02 C Proposed sales-breakeven sales Margin of safety % 26.73 D C/Proposed sales% Sales proposal Break even sales in units 5430 A Fixed cost/Contribution margin per unit Break even sales in dollars 1151145.87 B A*selling price per unit Margin of safety in sales dollars 265014.13 C Proposed sales-breakeven sales Margin of safety % 18.71 D C/Proposed sales% Memo. _______ ______ _____ Ref: Analysis of two proposals As we can see from the above analysis that Operating profit has increased in case of prodcution proposal. So we recommend to accept the production manager's proposal. And we can not accept the proposalof sales manager as it is resulting into decrease in operating profit compared to our existing profit. Thank You
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