ACC 550 Hampshire Company Case Study Section I Cost Volume Profit Analysis The Hampshire Company manufactures umbrellas that sell for $12 50 each In 2014, the company made and sold 60,000 umbrellas The company had fixed manufacturing costs of $216,000 It also had fixed costs for administration of $79,525 The per unit costs of each umbrella are as follows Direct Materials $3 00 Direct Labor $1 50 Variable Manufacturing Overhead $0 40 Variable Selling Expenses $1 10 Using the information above, perform a cost volume profit (CVP) analysis by completing the steps below All CVP calculations should be completed in the Hampshire Company Spreadsheet Note The CVP analysis satisfies Part A of Section I Compute net income before tax Compute the unit contribution margin in dollars and the contribution margin ratio for one umbrella Calculate the break even point in units and dollars of revenue Note This is a required part of the CVP analysis and satisfies Part C of Section I Break Even Point Fixed Costs Contribution Margin Break Even Point in Units X Selling Price per Unit Break Even Point Sales Calculate the margin of safety In units In sales dollars Margin of Safety in Dollars Current Sales in Dollars Break Even Point Sales in Dollars As a percentage Margin of Safety as a Percentage Margin of Sales in Units Current Unit Sales Calculate the degree of operating leverage Degree of Operating Leverage Contribution Margin Operating Income Assume that sales will increase by 20 in 2015 Calculate the percentage of before tax income for this increase Provide calculations to prove that your percentage increase is correct based on the operating leverage calculated in step 5 Units $ Per Unit Totals Sales 60,000 $12 50 $750,000 Variable Costs X $ 360,000 Fixed Costs $295,525 00 Net Income $374,950 00 Compute the number of umbrellas that Hampshire is required to sell if it plans to earn $120,000 in income before taxes by using the target income formula Proof your calculation A company that specializes in tours in England has offered to purchase 5,000 umbrellas at $11 each from Hampshire The variable selling costs of these additional units will be $1 30 as opposed to $1 10 per unit Also, this production activity will incur another $15,000 of fixed administrative costs Should Hampshire agree to sell these additional 5,000 umbrellas to the touring business Provide calculations to support your decision

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 07, 2024

ACC 550 Hampshire Company Case Study Section I: Cost-Volume-Profit Analysis The Hampshire Company manufactures umbrellas that sell for $12.50 each. In 2014, the company made

ACC 550 Hampshire Company Case Study

Section I: Cost-Volume-Profit Analysis

The Hampshire Company manufactures umbrellas that sell for $12.50 each. In 2014, the company made and sold 60,000 umbrellas. The company had fixed manufacturing costs of $216,000. It also had fixed costs for administration of $79,525. The per-unit costs of each umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead: $0.40

Variable Selling Expenses: $1.10

Using the information above, perform a cost-volume-profit (CVP) analysis by completing the steps below. All CVP calculations should be completed in the Hampshire Company Spreadsheet. Note: The CVP analysis satisfies Part A of Section I.

Compute net income before tax.

Compute the unit contribution margin in dollars and the contribution margin ratio for one umbrella.

Calculate the break-even point in units and dollars of revenue. Note: This is a required part of the CVP analysis and satisfies Part C of Section I.

Break-Even Point = Fixed Costs / Contribution Margin

Break-Even Point in Units X Selling Price per Unit = Break-Even Point Sales

Calculate the margin of safety:

In units

In sales dollars

Margin of Safety in Dollars = Current Sales in Dollars Break-Even Point Sales in Dollars

As a percentage

Margin of Safety as a Percentage = Margin of Sales in Units / Current Unit Sales

-Calculate the degree of operating leverage.

Degree of Operating Leverage = Contribution Margin / Operating Income

Assume that sales will increase by 20% in 2015. Calculate the percentage of before-tax income for this increase. Provide calculations to prove that your percentage increase is correct based on the operating leverage calculated in step 5.

	Units	$ Per Unit	Totals
Sales	60,000	$12.50	$750,000
Variable Costs	X	$	-360,000
Fixed Costs			-$295,525.00
Net Income			$374,950.00

Compute the number of umbrellas that Hampshire is required to sell if it plans to earn $120,000 in income before taxes by using the target income formula. Proof your calculation.

A company that specializes in tours in England has offered to purchase 5,000 umbrellas at $11 each from Hampshire. The variable selling costs of these additional units will be $1.30 as opposed to $1.10 per unit. Also, this production activity will incur another $15,000 of fixed administrative costs. Should Hampshire agree to sell these additional 5,000 umbrellas to the touring business? Provide calculations to support your decision.