The owners of Katy EH Manufacturing, a small manufacturer of gas grills, have pr
ID: 2718982 • Letter: T
Question
The owners of Katy EH Manufacturing, a small manufacturer of gas grills, have prepared a preliminary budget for the upcoming year and would like to assess the financial impact of several alternative scenarios, including dropping a product; changing the price on a product, with a resulting increase in volume; and shifting advertising focus, with a resulting shift in volume from one product to another. A new budget must be prepared. At year-end, the actual results are better than had been planned, but not necessarily better than what should have been, given actual sales volumes.
Hint Consider using the topic of contribution analysis as an easy way to analyze profit-planning issues such as adding or dropping a product or service; changing a price; adding or decreasing expected volumes; or preparing a profit budget. In this particular situation, there are three products, each with different proportions of variable and fixed costs. Make sure you can identify variable and fix costs. Pay attention to the relation of profit and contribution margin. In addition, you also need to consider non-financial factors prior to make your decision.
Required :
a) Should Katy EH drop Grill A? The owners wanted to know the impact of dropping Grill A from their line of products. Sharp was told to assume that the volumes and selling prices of the other two products would be the same whether or not the Grill A product line was dropped.
b) Should Katy EH lower the price of Grill C? The owners wanted to know the impact if they lowered the price of Grill C to $75 and if doing so led to a 20,000-unit increase in sales of Grill C .
c) Should Katy EH change its advertising focus? The owners wanted to know the impact of a 10,000-unit increase in Grill C volume and a related 10,000-unit decrease in Grill A volume because of a shift in advertising emphasis.
d) Should Katy EH lower the price of Grill C and change its advertising focus? The owners wanted to know the impact of lowering the price of Grill C to $75 and shifting the advertising focus more to Grill C, thereby decreasing Grill A volume by 10,000 units and increasing Grill C volume by 30,000 units .
e) Prepare a revised 2016 profit budget assuming the owners chose Option 2 – lowering the price of Grill C to $75 and expecting sales volume of that grill to increase to 220,000 units.
f) The actual results for 2016 are shown in Exhibits3-4. Was 2016 net income more or less than what should have been expected given these actual volumes and prices? If the results were different, why .
Exhibit 1: Operating Budget 2016: Draft 12/18/2015
Exhibit 2: Operating Budget 2016: Draft 12/18/2008
*This category comprises accounting, IT, human resources, legal, and others supporting the production of these products.
Exhibit 3: Actual 2016 Volume & Price
Exhibit 4: 2016 Operating Results: Draft 1/19/2017
Sales $41,200,000 Less: cost of products sold 22,800,000 Gross margin $18,400,000 SG&A 9,350,000 Other costs 2,100,000 Operating income $6,950,000 Less: Interest expense 420,000 Plus: Interest income 150,000 Income before tax $6,680,000 Income taxes 2,338,000 Net income $4,342,000Explanation / Answer
Grill A Grill B Grill C Notes Planned units 80,000 1,20,000 2,00,000 Per unit Sales price 150 110 80 Direct costs: Materials 17 10 7 directly related to volume Labor 21 16 4 directly related to volume Subtotal $38 $26 $11 Indirect cost: Supplies 7 2 1 directly related to volume Labor 10 8 4 one-half varies with direct labor, the rest is fixed Supervision 8 3 1 unrelated to volume Energy 12 6 4 one-half varies with direct labor, the rest is fixed Depreciation 22 7 5 unrelated to volume Support* 12 6 3 unrelated to volume All other 11 2 1 unrelated to volume Subtotal $82 $34 $19 Total cost $120 $60 $30 Profitability $30 $50 $50 Fixed Cost 64 25 14 VariableCost 56 35 16 Contribution margin 94 75 64 Contribution per FixedCost 1.46875 3 4.571429 Contrbn to OperIncome 2400000 6000000 10000000 18400000 Sales 12000000 13200000 16000000 41200000 Fixed Cost=(Labor/2)+Supervision+(Energy/2)+Depreciation+Support+All other VariableCost=Materials+Labor+Supplies+(Labor/2)+(Energy/2) Contribution margin=Sales Price-VariableCost A)dropping Grill A from their line of products would result in operating profit droping by 2400000 to 16000000 The operating margin would improve from 18400000/41200000=0.4466 to 16000000/(41200000-12000000)=0.5479 Thus improving margins suggests that dropping the product A would be better. The lowest contribution margin per fixed cost is lowest for A suggess A is least preferrable. B)If they lowered the price of Grill C to $75 then contribution margin of C lowers by 5 to 59 Contribution margin 59 Contrbn to OperIncome 9900000 (=(59-14)*(2,00,000+20000) Loss in OperIncome -100000 Katy EH should not lower the price of Grill C as this would affect the profits negatively reducing it by 100000 C) Increase in Contrbn to OperIncome by C 640000 (=(64)*(10000)) Decrease in Contrbn to OperIncome by A -940000 (=(94)*(10000)) Net decrease in OperIncome -300000 Katy EH should not change its advertising focus as its decreasing its profits. D) If they lowered the price of Grill C to $75 then contribution margin of C lowers by 5 to 59 Contribution margin 59 Contrbn to OperIncome 10350000 (=(59-14)*(200000+30000)) Increase in Contrbn to OperIncome by C 350000 Decrease in Contrbn to OperIncome by A -940000 (=(94)*(10000)) Net Decrease in Contrbn to OperIncome -590000 Katy EH should not lower the price of Grill C and change its advertising focus as it negatively affects income.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.