Consolidated Industries problem: Hi, I'm stuck on a cost accounting problem. It is on the attached document. The parts that I'm stuck on are in purple font. Thanks for your help!
CVP Computation problem: Consolidated Industries is studying the addition of a new valve to its product line. The valve would be used by manufacturers of irrigation equipment. The company anticipates starting with a relatively low sales volume and then boosting demand over the next several years. A new salesperson must be hired because Consolidated's current sales force is working at capacity. Two compensation plans are under consideration: Plan A: An annual salary of $22,000 plus a 10% commission based on gross dollar sales. Plan B: An annual salary of $66,000 and no commission. Consolidated industries will purchase the valve for $50 and sell it for $80. Anticipated demand during the first year is 6,000 units. (In the following requirements, ignore income taxes.) 1. Compute the break-even point for Plan A Gross dollar sales - 6,000 units X $80/unit = $480,000 10% commission on $480,000 = $48,000 $22,000 annual salary + $48,000 commission = $70,000 salary Plan A break-even point: $70,000 / $30 = 2,333 units WRONG Plan B break-even point: $66,000 / $30 = 2,200 units CORRECT 2. Compute the operating leverage factor of plan B at the anticipated demand of 6,000 units. Operating leverage factor = Contribution margin / net income Contribution margin = $80 - $50 = $30 Plan B: Net income calculations: Gross dollar sales - 6,000 units X $80 = $480,000 Manufacturing expense - $50/unit X 6,000 units = $300,000 Contribution margin = $480,000 - $300,000 = $180,000 Contribution margin less fixed salary expenses of $66,000 = $114,000 (net income) $180,000 / $114,000 = 1.58 CORRECT 3. Assume that a general economic downturn occurred during year 2, with product demand falling from 6,000 to 5,000 units. Determine the percentage decrease in company net income if Consolidated had adopted Plan A. Plan A: Net income calculations: 5,000 units X $80 = $400,000 gross sales Manufacturing expense - $50/unit X 5,000 units = $250,000 Contribution margin = $400,000 - $250,000 = $150,000 Contribution margin less fixed salary expenses of $70,000 = $80,000 (net income) Percentage of net income decrease of Plan A $80,000 compared to Plan B $114,000 = 4. Assume that a general economic downturn occurred during year 2, with product demand falling from 6,000 to 5,000 units. Determine the percentage decrease in company net income if Consolidated had adopted Plan B. CVP Computation problem: Consolidated Industries is studying the addition of a new valve to its product line. The valve would be used by manufacturers of irrigation equipment. The company anticipates starting with a relatively low sales volume and then boosting demand over the next several years. A new salesperson must be hired because Consolidated's current sales force is working at capacity. Two compensation plans are under consideration: Plan A: An annual salary of $22,000 plus a 10% commission based on gross dollar sales. Plan B: An annual salary of $66,000 and no commission. Consolidated industries will purchase the valve for $50 and sell it for $80. Anticipated demand during the first year is 6,000 units. (In the following requirements, ignore income taxes.) 1. Compute the break-even point for Plan A Gross dollar sales - 6,000 units X $80/unit = $480,000 10% commission on $480,000 = $48,000 $22,000 annual salary + $48,000 commission = $70,000 salary Plan A break-even point: $70,000 / $30 = 2,333 units WRONG Plan B break-even point: $66,000 / $30 = 2,200 units CORRECT 3. Assume that a general economic downturn occurred during year 2, with product demand falling from 6,000 to 5,000 units. Determine the percentage decrease in company net income if Consolidated had adopted Plan A. These are my calculations and they may be wrong: Plan A: Net income calculations: 5,000 units X $80 = $400,000 gross sales Manufacturing expense - $50/unit X 5,000 units = $250,000 Contribution margin = $400,000 - $250,000 = $150,000 Contribution margin less fixed salary expenses of $70,000 = $80,000 (net income) 4. Assume that a general economic downturn occurred during year 2, with product demand falling from 6,000 to 5,000 units. Determine the percentage decrease in company net income if Consolidated had adopted Plan B. Help
