Cost & Value Driver Problem

Based on the following information, complete the problems listed below on the Osprey Helicopters Company.

Baseline Financial Results [In $ Dollars 000]

Sales...$75,000

Basic Manufacturing Costs$30,000

General & Administrative Expense..$12,000

# Units shipped...15

Create a set of pro-forma forecasts based on the following baseline assumptions on key business drivers and specific assumptions for each of the two scenarios.

For the Baseline results shown above, the assumptions are (1) Basic Mfr. Costs and General & Administrative Expenses arising from the summary financial data above are treated as Fixed Costs, and (2) Contribution Margin Percentage is 60%. Helpful hint when doing scenario analysis: start by calculating the operating profit [and its underlying cost structure] arising from the information provided above. After doing this, then solve Scenarios 1 and 2.

Scenario 1: Assume Osprey ships 20 helicopters and maintains the same contribution margin percentage shown above. Basic manufacturing cost is assumed to be unchanged or same. The average selling price per unit remains the same, but operating expenses will increase by 5% to support higher shipment level.

What will be the pro-forma operating profit?

Scenario 2: Assume Osprey keeps the shipment level at 15 units, but increases the average selling price per unit by 10%.

What will be the pro-forma operating income?

Explain the difference in pro-forma operating income in Scenario 1 versus Scenario 2.