6-1. Cost-Volume-Profit Analysis (C. Horngren) based The income statement of the Hall Company appears below, Commissions are on sales dollars: all ocher variable expenses vary in terms of units soid. The factory has a capacity of 150,000 units per year. The results for 1981 have cen disappointing. Top management is sifting a number of possible ways to make operations profitable in 1982 Required: (Consider each situation independently) The sales manager is torn between two courses of action. He has studied the market potential and believes that a l5 percent slash in price would fill the plant to capacity b. He wants to increase prices by 25 percent, to increase advertising by 5150.000, and to boost commissions to 10 percent of sales. Under these circumstances, he thinks thaz unit volume will increase by 50 peresat Prepare the budgeted income statements, using a contribution margin for- mat (Sales Variable Expenses, Fixed Expenses) and two columns. What would be the new net income or loss under each alternative? Assume that there are no changes in fixed costs ocher than advertising. HALL COMPANY Income Statement For the Year Ended December 31, 198 5360,000 Sales (90,000 units$4.00) Cost of goods sold 550,000 0,000 Direct materials Direet labor Factory overhesd: 518.000 Variable 80.000 98.000 278.000 82,000 Gross margin Selling expenses: Shipping 3.600 $21,600 Fixed: 40.000 561,600 4,500 20.400 24900 86,000 Advertising, salaries, ete Administrative expenses: Fized Net loss Based on sales dolans.nox physical units. 2. The pre sident does not want to tinker with the price. How much may advertising be increased to bring production and sales up to 130.000 units and still earn a target profis of 5 percent of sales? 3. A mail-order firm is willing to buy 60.000 units of product "if the price is right." Assume that the present market of 90.000 units at $4 each wil not be discurbed. Hall Company will not pay any sales commission. The mail-order firm will pick up the units directly at the Hall factory. However Hall must refund $24,000 of the total sales price as a promtotional and advertising allowance for the mail-order firm. In addition, special pack- aging will increase manufacturing costs on these 60,000 units by 10e per i unit. At what unit price must the mail-order chain business be quoted for Hall to break even on total operations in 19827 The president suspects thata fancy new package will aid consumer sales and ultimately Hall's sales. Present packaging costs per unit are all variable and consist of se direct materials and 4e direct labor: new packaging costs will be 30e and 13e. respectively. Assuming no other changes in behavior, how many units musi be sold to earn a net profte20, oo0 4 coStS cost
