Question
I only need answer for part E & F Katy EH Manufacturing Company The owners of Katy EH Manufacturing, a small manufacturer of gas grills,
I only need answer for part E & F
Katy EH Manufacturing Company The owners of Katy EH Manufacturing, a small manufacturer of gas grills, have prepared a preliminary budget for the upcoming year and would like to assess the financial impact of several alternative scenarios, including dropping a product; changing the price on a product, with a resulting increase in volume; and shifting advertising focus, with a resulting shift in volume from one product to another. A new budget must be prepared. At year-end, the actual results are better than had been planned, but not necessarily better than what should have been, given actual sales volumes. Hint: Consider using the topic of contribution analysis as an easy way to analyze profit-planning issues such as adding or dropping a product or service; changing a price; adding or decreasing expected volumes; or preparing a profit budget. In this particular situation, there are three products, each with different proportions of variable and fixed costs. Make sure you can identify variable and fix costs. Pay attention to the relation of profit and contribution margin. In addition, you also need to consider non-financial factors prior to make your decision. Required:
A. Should Katy EH drop Grill A? The owners wanted to know the impact of dropping Grill A from their line of products. Sharp was told to assume that the volumes and selling prices of the other two products would be the same whether or not the Grill A product line was dropped.
B. Should Katy EH lower the price of Grill C? The owners wanted to know the impact if they lowered the price of Grill C to $75 and if doing so led to a 20,000-unit increase in sales of Grill C
C. Should Katy EH change its advertising focus? The owners wanted to know the impact of a 10,000-unit increase in Grill C volume and a related 10,000-unit decrease in Grill A volume because of a shift in advertising emphasis
D. Should Katy EH lower the price of Grill C and change its advertising focus? The owners wanted to know the impact of lowering the price of Grill C to $75 and shifting the advertising focus more to Grill C, thereby decreasing Grill A volume by 10,000 units and increasing Grill C volume by 30,000 units
E. Prepare a revised 2016 profit budget assuming the owners chose Option 2 lowering the price of Grill C to $75 and expecting sales volume of that grill to increase to 220,000 units
F. The actual results for 2016 are shown in Exhibits3-4. Was 2016 net income more or less than what should have been expected given these actual volumes and prices? If the results were different, why? A draft of the companys operating budget is shown in Exhibit 1. Standard costs for the three products are explained in Exhibit 2. Selling, general, and administrative (SG&A), other costs, interest income, and interest expense were likely to remain the same no matter which product-line combinations the company produced. Before calling it a day, the two owners asked their assistant, Jane Sharp, to determine the impact of several options on income before tax. They agreed to meet the following day, the Sharp hurried off to look at what these latest ideas would mean. She had six questions to address (see page 1) and was asked to consider each option independent of all other options. Sharp and the owners met the following morning to review her work. Having finished her duties, she left for an early weekend getaway. She didnt give the budget another thought. Early in January 2017, Sharp prepared a rough draft of the actual 2016 volume, selling price, and financial results (Exhibit 3 & 4). Exhibit 1
KATY EH Manufacturing Operating Budget 2016: Draft 12/18/2015
Sales $41,200,000 Less: costs of goods sold 22,800,000 Gross Margin $18,400,000 SG&A 9,350,000 Other costs 2,100,000 Operating income $6,950,000 Less: interest expense 420,000 Plus: Interest income 150,000 Income before tax $6,680,000 Income taxes 2,338,000 Net Income $4,342,000 |
Exhibit 2 Katy EH Manufacturing
Operating budget 2016: Draft 12/18/2015
Grill A Grill B Grill C Notes Planned units 80,000 120,000 200,000 Per unit Sales price $150 $110 $80 Direct costs: Materials 17 10 7 directly related to volume Labor 21 16 4 directly related ti volume Subtotal $38 $26 $11 Indirect cost: supplies 7 2 1 directly related to volume labor 10 8 4 one-half varies with direct labor, rest is fixed Supervision 8 3 1 unrelated to volume Energy 12 6 4 one-half varies with direct labor, the rest is fixed Depreciation 22 7 5 unrelated with volume Support 12 6 3 unrelated to volume All other 11 2 1 unrelated to volume Subtotal $82 $34 $19 Total cost $120 $60 $30 Profitability $30 $50 $50 |
Exhibit 3
Actual 2016 Volume & price
Grill A Grill B Grill C
Price $150 $110 $75
Volume 115,000 110,000 225,000
Exhibit 4
2016 Operating Results: Draft 1/19/2017
Revenue $46,225,000
Variable costs:
Materials 4,800,000
Direct labor 5,200,000
Supplies 1,300,000
Indirect labor 1,500,000
Energy 1,600,000
Total Variable cost $14,400,000
Fixed costs:
Indirect labor 1,300,000
Supervision 1,200,000
Energy 1,350,000
Depreciation 3,660,000
Support 2,300,000
All other 1,380,000
Total Fixed cost $11,190,000
Total cost $25,590,000
Gross Margin $20,635,000
SG&A 9,350,000
Other costs 2,100,000
Operating income $9,185,000
Less: Interest expense 420,000
Plus: interest income 150,000
Income before tax $8,915,000
Income taxes 3,120,250
Net income $5,794,750
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started