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.