Question
Please help me !! NTM Corporation was formed on January 1, 2016 and the company has been growing steadily since inception. The Chief Financial Officer,
Please help me !!
NTM Corporation was formed on January 1, 2016 and the company has been growing steadily since
inception. The Chief Financial Officer, Myrna Snowflake, has hired you to perform some costvolumeprofit
analysis to determine what changes can be made to increase profitability. She has provided you
with the following traditional income statement for 2019.
Total sales volume for 2019 was 550,000 units. The relevant range for NTM Corporation is 400,000
700,000 units.
Requirements:
(1) Prepare a contribution format income statement for 2019. Calculate the breakeven sales
dollars and the breakeven sales units.
(2) The Production Manager believes that by using a lower quality material, the cost of direct
material can be reduced by 10% per unit. While he doesnt expect the change in material
quality to be readily apparent, he believes that customers will overlook any change in quality if
the product has a lower sales price. He believes that by lowering the sales price by $1.25 per
unit, there will be a 7% increase in sales volume. Prepare a contribution format income
statement for this alternative. Calculate the breakeven sales dollars and the breakeven sales
units.
(3) The Quality Control Manager does not agree with the Production Managers suggestion and has
a different idea. He believes that an additional piece of equipment can be purchased. The new
piece of equipment will allow the company to decrease Direct Labor to 12.5% of Sales. The new
piece of equipment will increase fixed costs by $400,000 per year. The Quality Control Manager
also believes an increased marketing effort will lead to additional sales volume. He has
proposed spending an additional $9,000 per month on advertising which he believes will lead to
an increase in sales volume of 2%. Coupled with an increase in sales price per unit of $0.75, the
company should see increase profitability. Prepare a contribution format income statement for
this alternative. Calculate the breakeven sales dollars and the breakeven sales units.
(4) The Sales Manager also believes that an additional piece of equipment is the answer to
increased profitability. She agrees with the Quality Control Manager that a new piece of
manufacturing equipment can lead to cost savings. She has located a similar piece of equipment
to that suggested by the Quality Control Manager but at a cost of $350,000. The Sales Manager
believes that a decrease in sales price of $5.25 per unit will increase sales volume by 7.25%. In
addition, she believes the new piece of equipment will allow the company to eliminate some
direct labor which will change the revised direct labor percentage to be 10% of sales. With the
decrease in direct labor necessary to produce the merchandise, she is proposing laying off three
manufacturing managers for a total savings of $400,000. She also believes a change in the Sales
Department is necessary and has proposed eliminating all sales commissions and other variable
selling costs so that variable selling costs will be totally eliminated but sales salaries will be
increased by $80,000 per year. Prepare a contribution format income statement for this
alternative. Calculate the breakeven sales dollars and the breakeven sales units.
(5) Prepare a memo to the Chief Financial Officer summarizing the results of your analysis and your
recommendation for the best plan for the company. Include specific financial information from
your analysis. Also include any nonfinancial information that was part of your decision making
process.
NTM Corporation Income Statement For the Year Ended December 31, 2019 Sales $ 26,400,000 $ Cost of goods sold: Direct labor Direct material Variable manufacturing overhead Fixed manufacturing overhead Total cost of goods sold 3,960,000 2,640,000 2,376,000 4,400,000 13,376,000 Gross margin 13,024,000 $ Operat expenses: Variable selling expenses Fixed selling expenses Fixed administrative expenses Total operating expenses 1,056,000 1,375,000 2,475,000 4,906,000 Net operating income $ 8,118,000 NTM Corporation Income Statement For the Year Ended December 31, 2019 Sales $ 26,400,000 $ Cost of goods sold: Direct labor Direct material Variable manufacturing overhead Fixed manufacturing overhead Total cost of goods sold 3,960,000 2,640,000 2,376,000 4,400,000 13,376,000 Gross margin 13,024,000 $ Operat expenses: Variable selling expenses Fixed selling expenses Fixed administrative expenses Total operating expenses 1,056,000 1,375,000 2,475,000 4,906,000 Net operating income $ 8,118,000Step by Step Solution
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