Booth Company had sales in 2017 of $2,295,000 on 85,000 units.Variable costs totaled $1,275,000 and fixed costs totaled $550,000.

A new raw material is available that will decrease the variable costs per unit by 30% (or $4.50).However, to process the new raw material, fixed operating costs will increase by $250,000.Management feels that two-thirds of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction.The marketing department expects that this sales price reduction will result in a 5% increase in the number of units sold.

Instructions

1. Prepare a projected CVP income statement for 2017 (1) assuming the changes have not been made, and (2) assuming that changes are made as described. 10 points ( 5 each)

(b)Before Booth Company had the chance to implement usage of the new raw material, new industry specifications were announced and result in the following changes for the Booth Company.Variable costs will increase by 15% per unit and fixed costs will increase by $50,000.Management feels that a $3 per unit price increase is needed to accommodate the cost increases.However, this will result in a 10% decrease in units sold.Prepare a CVP income statement assuming these changes have been made. 5 points

(c)The marketing department suggests implementing an advertising promotion that would increase variable costs by $.50 per unit but would retain the original sales volume of 85,000 units.Prepare a CPV income statement with these changes.Do you recommend implementation of the advertising program?Why or why not? 5 points

Problem 2

30 Points

Tasty Time Cafeteria operates cafeteria food services in public buildings in the Midwest.Tasty Time is contemplating a major change in its cost structure.Currently, all of their cafeteria lines are staffed with hourly wage employees who hand serve the food to customers.Benson Riggs, Tasty Time's owner, is considering replacing the employees with an automated self-service system.However, before making the change, Benson would like to know the consequences of the change, since the volume of business varies significantly from location to location.Shown below are the CVP income statements for each alternative.

Personal Service Automated Self-Service

SystemSystem ______

Sales$2,500,000$2,500,000

Variable costs1,875,000 1,125,000

Contribution margin$625,000$1,375,000

Fixed costs125,000875,000

Net Income$500,000$500,000

Instructions.

(a)Which alternative would produce the higher net income if sales increased by $250,000? 5 points

(b) Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss. 5 points

(c)Tasty Time's vice president of finance has offered another option.He suggests a different system that combines personal service at key points in the cafeteria line with a less expensive automated self -service system for the other items.The financial information on this system is given below:

Blended Service

System

Sales$2,500,000

Variable costs1,500,000

Contribution margin$ 1,000,000

Fixed costs500,000

Net Income$500,000

(1)Determine the degree of operating leverage for this option. 5 points

(2)How much would net income increase if sales increased by $250,000? 5 points

(3)Using the margin of safety ratio, how large of a decline in sales could this option sustain before operating at a loss. 5 points

(4)Which option do you recommend for Tasty Time Cafeteria? 5 points

Problem 1 20 Points Booth Company had sales in 2017 of $2,295,000 on 85,000 units. Variable costs totaled $1,275,000 and fixed costs totaled $550,000. A new raw material is available that will decrease the variable costs per unit by 30% (or $4.50). However, to process the new raw material, fixed operating costs will increase by $250,000. Management feels that two-thirds of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 5% increase in the number of units sold. Instructions (a) Prepare a projected CVP income statement for 2017 (1) assuming the changes have not been made, and (2) assuming that changes are made as described. 10 points ( 5 each) (b) Before Booth Company had the chance to implement usage of the new raw material, new industry specifications were announced and result in the following changes for the Booth Company. Variable costs will increase by 15% per unit and fixed costs will increase by $50,000. Management feels that a $3 per unit price increase is needed to accommodate the cost increases. However, this will result in a 10% decrease in units sold. Prepare a CVP income statement assuming these changes have been made. 5 points (c) The marketing department suggests implementing an advertising promotion that would increase variable costs by $.50 per unit but would retain the original sales volume of 85,000 units. Prepare a CPV income statement with these changes. Do you recommend implementation of the advertising program? Why or why not? 5 points Problem 2 30 Points Tasty Time Cafeteria operates cafeteria food services in public buildings in the Midwest. Tasty Time is contemplating a major change in its cost structure. Currently, all of their cafeteria lines are staffed with hourly wage employees who hand serve the food to customers. Benson Riggs, Tasty Time's owner, is considering replacing the employees with an automated self-service system. However, before making the change, Benson would like to know the consequences of the change, since the volume of business varies significantly from location to location. Shown below are the CVP income statements for each alternative. Sales Variable costs Contribution margin Fixed costs Net Income Personal Service System $2,500,000 1,875,000 $ 625,000 125,000 $ 500,000 Automated Self-Service System ______ $2,500,000 1,125,000 $1,375,000 875,000 $ 500,000 Instructions. (a) Which alternative would produce the higher net income if sales increased by $250,000? 5 points (b) Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss. 5 points (c) Tasty Time's vice president of finance has offered another option. He suggests a different system that combines personal service at key points in the cafeteria line with a less expensive automated self -service system for the other items. The financial information on this system is given below: Sales Variable costs Contribution margin Fixed costs Net Income (1) (2) (3) (4) Blended Service System $2,500,000 1,500,000 $ 1,000,000 500,000 $ 500,000 Determine the degree of operating leverage for this option. 5 points How much would net income increase if sales increased by $250,000? 5 points Using the margin of safety ratio, how large of a decline in sales could this option sustain before operating at a loss. 5 points Which option do you recommend for Tasty Time Cafeteria? 5 points