Mirabel Manufacturing is a small but growing company that manufactures and sells marine sonar equipment. They employee a national sales force and their primary customers are marine retailers and boat dealerships. The company has expanded over the last 5 years and Paul Mirabel, the founder and CEO has become concerned that he no longer has a clear picture of their cost structure. He calls his CFO, Mary Jane Montgomery in for a meeting.

Mary Jane, I am concerned that I am not current on our cost structure and how that is impacting our bottom line, Paul begins.

Well, Paul, the company has grown considerably over the past 5 years, so Im not surprised that you feel a little disconnected with how things are going, Mary Jane replied. She continued In fact, Ive been meaning to talk to you about a couple of big items such as increasing the sales commission to 15%. Weve lost two of our best account managers in the last 9 months. It seems like we are behind the curve paying only 12% on gross sales.

What do you mean we are behind the curve, Paul replied angrily. We have always been the leader in every aspect of our business.

Well, that may have been the case in the past, Paul, but frankly we need to step up our compensation package to stay competitive, Mary Jane replied. She continued, And thats not everything. I met with Frank Jacobs from marketing and he said we need to have a bigger presence at the trade show in March. He told me he would need about $650,000 added to the marketing budget to support new marketing materials.

Come on, Mary Jane, how can we do that when we are going to have to increase commission? He continued, I spoke with Dan Clark in production and he indicated that we have two pieces of equipment that need to be replaced by the end of the quarter and thats going to set us back almost $1.2 million.

Mary Jane shook her head. Paul, I hate to bring this up but while we are talking costs, but Bob in purchasing stopped by the office and dropped off some revised cost information it looks like several of our suppliers are talking about significant price increases by the end of the year.

Paul slumped in his chair. This is a mess, Mary Jane. Increasing commissions, new equipment, materials price increases and marketing expenses all at once. Even if Frank Mallow is correct that we should see a 10% increase in sales for the coming year, I just dont see how we can make this work. We have to maintain enough profit to keep the shareholders happy and I cant sleep when we dip below that $2 million margin of safety.

Mary Jane gathered up her papers. Before you get too distressed, let me put together some figures and lets see what this looks like on paper. Ill get back to you by the end of the week. In the meantime, stay positive, well find the best solution.

The following income and cost data for Mirabel is provided:

Mirabel Manufacturing

Budgeted Income Statement

For the Year Ending December 31

Sales

36,750,000

Cost of goods sold

Variable expense

Fixed expense

13,300,000

9,300,000

Gross margin

14,150,000

Selling and administrative

Commission

Fixed marketing expense

Fixed administrative

4410,000

1350000

6000000

Net operating income

2390000

Model 101Model 201Model 301

Normal Annual Sale volume 160001900011000

Unit sales price$ 6507501100

Variable expense per unit$250200500

1. What is Mirabels over-all break-even point in sales dollars? ( 5 marks)

2. Assume that sales revenue remains constant, what is the impact on break-even and the margin of safety if Paul takes Mary Janes advice and increases sales commission to 15%? ( 5 marks)

3. If Mirabel purchases the new equipment for $1,200,000, it will increase fixed costs by 10% but will decrease the variable cost per unit for all 3 models by 5%. What will Mirabels new break-even point be? ( 5 marks)

4. Assume that sales volume remains fixed but there is a 5% increase in variable expenses (materials cost) for the Model 101 and 301, and a 10% increase in variable expenses for Model 201. What is the new break-even? ( 5 marks)

5. Write the advantages and disadvantages of cost volume profit analysis. ( 5 marks)

Report:

Prepare a report from Mary Jane to Don explaining how these changes will affect Mirabels overall cost structure. For those changes that are controllable, make a recommendation considering the uncontrollable cost changes. Be certain to consider not only the companys break-even point, but also the desired margin of safety.