PARAMETERS FOR BASELINE CASE
The following numbers are estimates for the upcoming year for a manufacturing company.
Since the company is effective at implementing a JIT inventory system, assume there is
no beginning or ending inventory.
No. of units sold	36,000
Selling price per unit	$243.00
	Fixed Expenses	Variable Expenses (per unit sold
Production costs:
Direct materials		$18.23
Direct labor		36.45
Factory overhead	$2,187,000	24.30
Marketing expenses:
Sales salaries and commissions	546,750	7.60
Advertising	364,500
Miscellaneous mktg. expenses	109,350
Administration expenses:
Office salaries	729,000
Supplies	106,313	1.50
Miscellaneous admin. expenses	72,900
TOTAL EXPENSES	$4,115,813	$88.08

1. Make CVP Calculations for the Baseline Case

1. Prepare a contribution margin income statement (also called a variable-costing income statement) for the manufacturing company for the upcoming year. Examples of contribution income statements are on page 79, Exhibit 3-1 of the Datar and Rajan textbook and in the Chapter 3 (Datar and Rajan) course notes. Create this statement below the baseline case parameters in the Excel file you download. Key in proper headings.

Check figure: Operating profit (operating income) of $1,461,307.

2. Compute the company’s contribution margin per unit and contribution margin percentage for the upcoming year. The contribution margin percentage is calculated as contribution margin per unit / selling price per unit or as total contribution margin / total revenue. Make these calculations below your income statement. Clearly label these calculations.
3. Calculate the company’s breakeven point in units for the upcoming year. Make this calculation below your contribution margin calculations. Use Excel’s “round” function to round up to the nearest whole number. To do this, move your curser to the cell beside the decimal number and key in the following formula: =ROUNDUP(cell reference,0). The italicized cell reference means you need to key in the cell where the decimal number is located (e.g., F12). The number 0 means zero decimal places. Clearly label this calculation.
4. Calculate the company’s breakeven point in sales dollars for the upcoming year. Make this calculation below your breakeven calculation in units and use the company’s contribution margin percentage to make this calculation. Clearly label this calculation.

. 2. Complete Four Scenarios (What-if Analyses)

You want to determine whether the following four suggestions (i.e., e, f, g, h) would improve the company’s performance. Determine the effects of each suggestion on operating income, contribution margin per unit, contribution margin percentage, breakeven point in units, and breakeven point in sales dollars. Calculate the effects of each suggestion independently of the other suggestions. In other words, use the original baseline case data and make the first change (e); use the original baseline case data and make the second change (f); and so on. However, do not overwrite the original baseline case.

1. Put all personnel on commission. This action would affect the sales salaries and commissions expense by eliminating the fixed portion and by increasing the variable portion by $8.10 per unit. Sales would increase by 4,500 units.
2. Redesign the package for the product. This would decrease the variable direct materials cost by $0.45 per unit but would increase the fixed factory overhead by $157,500.
3. Launch a new advertising campaign. This would increase fixed advertising expense by $450,000 but would increase sales volume by 4,300 units.
4. Reduce the selling price of the product by $16.20 per unit. This would increase sales volume by 3,500 units.
5. Write a memo, explaining why each suggestion should or should not be accepted. Create your memo in Word, not Excel. Use proper memo format. Word has a memo template (FILE | NEW | type in ‘memo’ in the ‘search for online templates’ box).