BTB110 Assignment #2 Due: Thursday, April 10, 2008 Value: 10% of final grade 1. The budgets of four companies yield the following information: A Target Sales Variable Expenses Fixed Expenses Operating Income(Loss) Units Sold Unit Contribution Margin Contribution Margin Ratio B C D $________ $340,000 100,000 120,000 ________ 80,000 138,000 ________ __________ $_________ __________ 5,000 __________ $500,000 $_________ ________ 104,000 35,000 125,000 __________ _________ $100 $2 $14 0.20 _________ _________ 0.60 Instructions: Fill in the blanks for each company. Which company has the lowest break-even point? What causes the low break-even point? 2. The condensed income statement for the Tawatinaw Corporation for 2005 is as follows: TAWATINAW CORPORATION Income Statement Year Ended December 31, 2005 Sales (200,000 units) $1,200,000 Cost of Goods Sold 800,000 Gross Profit 400,000 Operating Expenses Selling 280,000 Administrative 160,000 440,000 Net Loss (40,000) A cost-behavior analysis indicates that 75% of the cost of goods sold is variable, 50% of the selling expenses are variable, and 25% of the administrative expenses are variable. Instructions: (round to the nearest unit, dollar, and percentage where necessary) (a) Convert the income statement to a contribution margin format. (b) Calculate the break-even point in total dollars and in units for 2005. (c)The CFO has a plan to get the company out of the red, and to improve its profitability. She feels that the quality of the product can be substantially improved by spending $0.55 more per unit on better raw materials. The selling price per unit can also be increased but only to $6.50 because of competitive pressures. She estimates that the sales volume will increase by 30%. What effect will the CFO’s plan have on the company profits and break-even point in dollars? (d)The marketing manager believes that the sales volume can be increased only by intensive advertising and promotional campaigns. He therefore proposed the following plan as an alternative to the CFO’s: (1) increase variable selling expenses to $0.85 per unit, (b)lower the selling price per unit by $0.20, and (3) increase fixed selling expenses by $20,000. The marketing manager quoted an Internet marketing research report that claimed that sales volume would increase by 50% if these changes were made. What effect will his plan have on the company’s profits and break-even point in dollars. (e)Which plan should be accepted? Explain your answer.