Problem #2: CVP Analysis Sharon McFarland has just earned a degree in management from a prestigious university in the United Kingdom. She has taken a position as assistant to the president at Johnson Engineering, which manufactures tungsten carbide drill bits for the gold mining industry. Johnson produces two types of bits: a Xm diameter and a 1" diameter model. The manufacturing takes place in three departments. Tip-fabricating makes the tungsten carbide drill tips out of powdered wolfram. The forging department slots the alloy steel rod and heat-treats it for strength. Finally, the assembly department attaches the tips to the steel rods in a high-temperature brazing process. Volume, pricing and cost data is provided below. 3/4 Inch 1 Inch total Sales (000's units) 275 200 475 Selling Price $55.00 $75.00 $30,125 Direct Material $15.00 $21.00 $8,325 Direct Labor $5.00 $10.00 $3,375 Manufacturing OH $17.00 $22.00 $9,075 Gross profit $37.00 $53.00 $20,775 Selling, General & Administrative $7.00 $5.00 $2.925 Operating profit $11.00 $17.00 $6,425 . This included utilities, manufacturing management salaries, quality control, production planning, manufacturing engineering, accounting, property taxes, and other indirect support costs that could not be traced to the individual products. It was generally agreed that these costs did not vary over the volume ranges anticipated in the near future. ** These are fixed costs. (1) Complete the totals column at the right above. (2 points) (2) Calculate the WACM. (2 points) (3) Calculate break-even volume. (2 points) break-even volume use 2 digits to the right of the decimal point 3/4 Inch 1 Inch points (4) Calculate the volume required to achieve a pretax Olof $8,000. (2 points) volume target pretax O1 $8,000 3/4 Inch 1 Inch points (5) Calculate the volume required to achieve an after tax Ol of $8,000. The income tax rate is 34%. (2 points) volume target after tax ol $8,000 income tax rate 34.0% Johnson Engineering is considering a 10% reduction in price for the 3/4 inch bits and a 15% reduction in price for the 1 inch (6) bits. The price elasticity of demand is estimated to be (2.2). Complete the income statement below. This problem does not require you to allocate fixed costs to individual products. (12 points) 3/4 Inch 1 Inch -10.00% -15.00% price reduction (%) (2.20) (2.20) price elasticity of demand 3/4 Inch 1 Inch total points Sales (000's units) Selling Price Direct Material Direct Labor Manufacturing OH Gross profit Selling, General & Administrative 31 Operating profit 02
