PART ONE: 15 PTS.

Based in Italy, Datura, Ltd., in an international importer-exporter of pottery with distribution centers in the United States, Europe, and Australia. The company was very successful in its early years, but its profitability has since declined. As a member of a management team selected to gather information for Daturas next strategic planning meeting, you have been asked to review its most recent contribution margin income statement for the year ended December 31, 2015, which follows:

Datura, Ltd.

Contribution Margin Income Statement

For the year Ended December 31, 2015

Sales Revenue* $13,500,000

Less variable costs:

Purchases 6,000,000

Distribution 2,115,000

Sales commissions 1,410,000

Total variable costs 9,525,000

Contribution margin $ 3,975,000

Less fixed costs:

Distribution 985,000

Selling 1,184,000

General and Admin. 871,875

Total fixed costs 3,040,875

Operating Income 934,125

*In 2015, Datura sold 15,000 sets of pottery.

REQUIRED:

For each set of pottery sold in 2015, calculate the:

Selling Price per unit

Variable Purchases cost per unit

Variable Distribution cost per unit

Variable Sales Commission per unit

Contribution Margin per unit

Calculate the break-even point in units and in sales dollars.

Historically, Daturas variable costs have been about 60 percent of sales. What was the ratio of variable costs to sales in 2015 (round to two decimal places)?

PART TWO: 10 PTS.

Refer to the information in Part One. In January 2016, the president of Datura, Ltd., conducted a strategic planning meeting. During the meeting, the vice president of distribution noted that because of a new contract with an international shipping line, the companys fixed distribution costs for 2016 would be reduced 10 percent and its variable distribution cost per unit by 4 percent. The vice president of sales offered the following information:

We plan to sell 15,000 sets of pottery again in 2016, but based on review of the competition, we are going to lower the selling price to $890 per set. To encourage increased sales, we will raise sales commissions to 12 percent of the selling price.

The president is concerned that the changes described by the vice presidents may not improve operating income sufficiently in 2016. If operating income does not increase by at least 10 percent, she will want to find other ways to reduce the companys costs. She asks you to evaluate the situation by preparing a report.

REQUIRED:

Prepare a budgeted contribution margin income statement for 2016. Your report should show the budgeted (estimated) operating income based on the information presented in Part One and Part two. Will the changes improve operating income sufficiently? Explain?

PART THREE:

As noted in Parts One and Two, Datura Ltd., sold 15,000 sets of pottery in 2015. For the next year, 2016, Daturas strategic planning team targeted sales of 15,000 sets of pottery, reduced the selling price to $890 per set, increased sales commissions to 12 percent of the selling price, and decreased fixed distribution costs by 10 percent and variable distribution cost per unit by 4 percent. It was assumed that all other costs would stay the same.

Based on the analysis of these changes, Daturas president is concerned that the proposed strategic plan will not meet her goal of increasing Daturas operating income by 10 percent over last years income and that the operating income will be less than last years income. She has come to you for a spreadsheet analysis of the proposed strategic plan and for the analysis of a special order she just received from an Australian distributor for 4,500 sets of pottery. The orders selling price, variable purchases cost per unit and sales commission will be the same as the rest of the business, but the variable distribution costs will be $160 per unit. Total fixed costs will be unaffected by the special order.

REQUIRED:

Calculate the total contribution margin from the Australian Sales.

Prepare a revised budgeted contribution margin income statement for 2016 that includes the Australian order. Does Datura need the Australian sales to achieve its targeted operating income for 2016?