ACCT $621$: Group Case Study

TREKK COMPANY

Trekk company produces specialty water bottles and sells them to retailers who sell them

directly to consumers. The water bottles are high quality bottles produced for outdoor activities

such as camping. In December $2019,$ Jackson Triggs, the president of the company, was

considering an alternative marketing plan for $2020$ that was presented to her by Stephanie

Terril, the marketing manager. Based on sales from January through December $2019,$ Jackson

expected that $2020$ sales would amount to $300,000$ units. The alternative marketing plan is

presented below:

$2020$ Marketing Plan: $$At the present time, we sell the product to retailers for $$8\mathrm{.}00$ per bottle.

Retailers generally charge the consumers between $$9$ and $$9\mathrm{.}50.$ If we cut our selling price to

retailers to $$7\mathrm{.}50,$ I expect that the product will do much better. Their increased markup will

give them the incentive to display our product more prominently and to promote it more

vigorously to customers. We should support this strategy by supplying more promotional

materials to retailers, which I expect would be an increase of $$4,600$ in Advertising and

Promotion costs. Based on the price cut and the increase in advertising and promotion, I

expect that we will be able to boost our sales volume by $18$ percent to $348,100$ units in $2020.$

Jackson received cost data from the company$$s CFO, Ken Choi. Ken expects that the cost data

below are also reliable estimates for $2020$ for a production volume up to $400,000$ units. Beyond

$400,000$ units, the company would have to rent additional machines $($with a capacity of $100,000$

units each$),$ which would increase fixed manufacturing overhead costs by $$50,000$ per machine.

$2019$ Cost Data

Manufacturing Costs for water bottles $($based on production volume of $295,000$ units$)$:

Direct Materials: $$0\mathrm{.}85$ per unit

Direct Labor: $$9\mathrm{.}75$ per hour $($each worker can make $20$ units in $1$ hour$)$

Packaging: $$0\mathrm{.}70$ per unit

Variable Manufacturing Overhead: $$1\mathrm{.}45$ per unit

Fixed Manufacturing Overhead: $$550,000$

Selling and Administrative Costs for bottles $($based on sales volume of $295,000$ units$)$:

Sales Commissions: $$0\mathrm{.}80$ per unit

Shipping Costs: $$0\mathrm{.}50$ per unit

Advertising and Promotion $($fixed$)$: $$180,000$

Fixed Selling and Admin Expenses: $$270,000$

Using the information on page $1,$ answer the following questions. Include all costs

$($manufacturing costs and selling and administrative costs$)$ in your calculations.

$1.$ Using the current information from $2019$:

a$.$ Prepare a CVP Income Statement $($total and per unit$)$ for $2019$ using the current

production and sales volume $(295,000$ bottles$)$ and the $2019$ cost data, assuming

no changes to selling price or costs.

b$.$ Using the above CVP Income Statement, determine the Company$$s contribution

margin ratio for $2019.$

c$.$ Using the $2019$ cost data, determine the $2019$ break$-$even point in number of

bottles for the company, assuming no changes to selling price or costs. For full

credit, please show all of portions of your calculations.

$2.$ Assuming the selling price and cost changes in the Marketing Plan are adopted:

a$.$ prepare a CVP Income Statement $($total and per unit$)$ for $2020,$ assuming sales

and production increase by $18\%$ as outlined in the Marketing Plan.

b$.$ Using the above CVP Income Statement, determine the Company$$s Contribution

Margin Ratio for $2020.$

c$.$ Assuming the selling price and cost changes in the Marketing Plan are adopted,

determine the break$-$even point in number of bottles for the company in $2020.$

For full credit, please show the elements of your computations. Round to the

nearest next whole unit.

$3.$ Assuming the selling price and cost changes in the Marketing Plan are adopted,

determine the number of bottles the company would need to sell in $2020$ in order to

earn $$150,000$ in profit. For full credit, please show the elements of your computations.

$4.$ Trekk Company has been approached by the government, which is seeking to buy

$150,000$ bottles for its volunteer camping centers in $2020.$ The proposed government

contract states that the government would pay Trekk Company a price of $$4\mathrm{.}25$ per

bottle. If Trekk decides to accept this special order, they would avoid packaging costs

for this contract as well as all variable selling and administrative costs. The company$$s

capacity is limited to only $400,000$ units. If they accept the government contract, they

will need to increase their capacity by renting an additional machine. Refer to page $1$

for the company$$s estimated cost data and additional machine rental cost. Assume that

Trekk does not adopt the proposed Marketing Plan and that the company$$s production

and sales level without the government contract is expected to be $295,000$ bottles for

$2020.$

$$ Prepare an analysis below to determine the incremental net income or net loss that

Trekk Company would recognize if they accept this special order.