Cost-Volume-Profit

Wakky Company sells widgets for $55 each. The variable cost per widget is $44.55 and the total fixed cost is

$639,100 annually. Current sales volume is 70,000 widgets. Management is considering the following changes:

Alternative #1:

Lease a new packaging machine for $20,000 annually which will reduce variable cost by $1.10 per widget.

Alternative #2:

Increase selling price by 8% to help offset an expected 30% increase in fixed cost.

Alternative #3:

Reduce fixed cost by 50% by moving to a lower rent location. This would cause variable cost to increase by 10%.

REQUIRED: Considering the current situation and each possible alternative separately from each other, do the following:

1.

Complete the grid below for the current level of production and each of the alternatives.

For each alternative refer to the current data (round to 3 decimal places if necessary).

Current

Alternative #1

Alternative #2

Alternative #3

Unit selling price

Unit variable cost

Unit contribution margin

Contribution margin ratio

Fixed costs

Net income

2.

Respond to the questions below in the space provided.

a)

Calculate the net income assuming Alternative #1 and sales of 60,000 widgets

b)

Determine the current break-even point in both units and dollars.

c)

Determine the break-even point in both units and dollars for Alternative #1.

d)

Determine the break-even point in both units and dollars for Alternative #2.

e)

Determine the break-even point in both units and dollars for Alternative #3.

f)

Determine the volume of sales in both units and dollars to earn net income of $225,000 assuming Alternative #1.

g)

Determine the volume of sales in both units and dollars to earn net income of $225,000 assuming Alternative #2.

h)

Determine the volume of sales in both units and dollars to earn net income of $225,000 assuming Alternative #3.

i)

If the company maintains the current level of sales (70,000 widgets) which alternative, if any would you choose?

Why???

j)

Would your answer to i) be the same if the current quantity of widgets sold decreased by 20%? Why???

Wakky Company
CVP Income Statement
December 31, 2013
						Company Totals					Amounts Per Widget
Sales							$	3,850,000				$	55.00
Variable costs:
	Direct materials				$	1,050,000				$	15.000
	Direct labor					1,260,000					18.000
	Indirect materials					252,000					3.600
	Indirect labor					367,500					5.250
	Machinery repairs					105,000					1.500
	Factory utilities (80% variable)					84,000					1.200
		Total variable costs						3,118,500					44.55
Contribution margin								731,500					10.45
	Factory depreciation					36,750					0.525
	Factory rent					183,750					2.625
	Factory utilities (20% fixed)					21,000					0.300
	Sales salaries					175,000					2.500
	Store rental					36,400					0.520
	Store utilities					12,600					0.180
	Administrative salaries					136,500					1.950
	Office rent					28,000					0.400
	Office utilities					9,100					0.130
		Total fixed costs						639,100					9.13
Income from operations							$	92,400				$	1.32
		70,000	widgets sold