Question 1 The sustainability manager is concerned about the long term sustainability implications of Deluxe Boxes on the environment and suggests changing to sustainable materials for the production of a Sustainable Deluxe Box. If the company switches the current quantity of Deluxe Boxes sold, to Sustainable Deluxe Boxes, there will be some cost implications. 1)The Sustainable Deluxe Boxes could be made cheaper, and the sustainability manager believes that the company could sell the Sustainable Deluxe Boxes for 523 per box and end up making substantially higher profit than they ever did on the Deluxe Boxes. Based on knowledge of price elasticity of demand s/he/they suggest that it may in time even result in much higher sales volumes. The marketing manager believes that a lower selling price will also entice current Deluxe Box customers to accept the switch over to the Sustainable Deluxe Box. 2)The new Sustainable Deluxe Boxes will still attract 60% of the fixed costs allocated to the old Deluxe Box under the ABC method used in tab 3. 3)The number of boxes sold will not currently be affected by this new selling price, as this is a very select group of customers for LGI. #A)The Standard Box costs and revenue will remain the same as that calculated under the ABC method 5)In order to help overall profit, the variable costs per sustainable Deluxe box will be reduced to $11 per box vice the original $20 per box. Required (complete the grey spaces) 1)Determine the profit and profit percentage for the Standard and Sustainable Deluxe Boxes Standard Boxes Sustainable Deluxe Boxes Total Quantity 108.00 18.00 126.00 Selling price per unit S 18.80 | 23.00 | 41.80 Revenue S 2,030.40 | 414.00 | 2,444.40 Subtract: Variable Costs s 1,080.00 | & 198.00 | 1,279.00 Equals: Contribution Margin 5 95040 | 5 316.00 | & 1,166.40 Subtract: Fixed Costs S 16.84 | 5 83.50 | 100.34 Equals: Operating Profit S 933.56 | S 132.50 | 1,066.06 Operating Profit % (based on revenue) 45.98% 32.01% 43.61% Contribution Margin % 46.81% 52.17% 47.71% Question 1 LGI's production managers think that the profit on Deluxe Boxes are much lower than the Intern suggested after recently attending a course at UMGC where they learned about ABC costing. They propose allocating the total fixed costs between Standard and Deluxe boxes based on this method . They collected information about the cost drivers and the break up of the total costs in Table 1 below. How much overhead would be allocated to Standard and Deluxe Boxes ( in total and per unit) using this method? Show all supporting calculations. Complete the grey spaces Table 1 . - . ) Cost for Standard Cost of Deluxe Manufacturing overhead| 3% Amount (millions) Cost driver Standard Box Deluxe Box Totals of Drivers Depreciation Maintenance Purchase order processing Inspection Indirect Materials Supervision S ynits manufactured 100009 S : 3 Total Allocated costs $156.00 - @ @0 @005 @ 6 Number of boxes per 108 18 year Allocated Cost per Box S Question 1 Standard Boxes Deluxe Boxes Total Revenue S 2,030.40 | 513.00 | S 2,543.40 Subtract: Variable Costs | 1,080.00 | 360.00 | S 1,440.00 Equals: Contribution S 950.40 | 153.00 | 1,103.40 Subtract: Fixed Costs S 16.84 | 5 139.16 | 156.00 Equals: Operating Profit | 933.56 | 13.84 | 947.40 Operating Profit % (based on Revenue) 45.98% 2.70% 37.25% Question 2 The CEO is not convinced and still thinks that no form of a Deluxe Box, sustainable or not should be produced. The CEO indicates that consideration of the production of a Sustainable Deluxe Boxes will only be considered if it can achieve at least the same operating profit percentage for the Sustainable Deluxe Boxes as the operating profit percentage indicated under the ABC costing method for Standard Boxes (See Tab 3) . Required {Complete the grey and yellow spaces). Using Operating Profit % Using Gross Profit % Required profit 45.98% See Question 1 Subtract: Existing profit 32.01% See O 1above Equals: Difference in additional profit required 13.97% Question 3 Required: Work out the percentage that the company should mark up on the costs of Sustainable Deluxe Boxes to achieve the same profit % as for the Standard boxes. [Complete the grey and yellow spaces Using Gross Profit % Using Operating Profit % Revenue % Subtract: Required Operating Profit Equals: Cost % 54.02% Question 4 Assume the company can still sell the same quantity of the Sustainable Deluxe Boxes as for the Deluxe Boxes Required {Complete the grey spaces and yellow space) Use the percentage calculated in Question 3 to determine at which price the company should sell the Sustainable Deluxe Boxes to reach the same profit percentage as for the Standard Boxes. Using Contribution Margin % Total (5) Total (5) Variable Costs 5 198.00 Plus : Fixed Costs 5 83.50 Equals: Total Costs S 281.50 Determine Revenue 5 521.09 Units sold {per year) S 18.00 Sales Price per unit 5 28.95 Question 5 Required: Prove that your calculation in Q 4 is correct. Complete the grey and yellow boxes. | Using Contribution Margin % Proof: Total {S) Total () Revenue S 521.09 Subtract: Variable Costs 5 198.00 Equals: Contribution Margin s 323.09 Subtract: Fixed Costs S 83.50 Operating Profit S 239.59 Operating Profit % 45.98% In Project 3 you will analyze managerial and costing information to improve the company's EBITDA. You will use what you have learned about cost behavior and apply activity-based costing and cost-volume-profit analysis to make recommendations about LGI's operational productivity. Step 1: Use the information you calculated in Project 2 Tab 3 Profit Maximization to populate has Columns Cto Hin Question 1. Step 2: Assume the company operates for 12 months of the year convert the information you populated in Columns to H to annual information and populate Columns |to M for both the Standard and Deluxe Boxes. Step 3: Assume for this project that the only variable costs in this company are matshals and labor. All other overhead costs will be assumed to be fixed. Note: The Total Fixed Cost of 156 is supposed to be constant for the production of total boxes including Standard Box and Deluxe Box on Tabs 1, 2, and 3. On Tab 1, the total fixed costs of 156 are allocated based on a lump sum method (arbitrarily using a monthly allocation basis). On Tab 2, the total fixed costs of 156 are allocated based on the sales volume (the number of boxes sold). On Tab 3, the total fixed costs of 156 are allocated based on the cost drivers. 1 Annual information ( for 12 Months) . Variable Cost |Variable Cost| Fixed cost per Total Cost . Standard boxes sold per . Revenue (price x ) ) Monthly Profit o Price per Standard | (cost per unit month (Fixed + Annual Revenue Annual VC Annual FC Annual Total maonth [millions) volume) L ~ (revenue - all costs) L L L .- N box x volume) (millions) Variable) (millions) (millions) (millions) Costs (millions) Annual Profit 5 S 22.00 | % 110.00| 10.00( & 50.00 (% 10.00| 60.00| S 50.00] 1,320.00 | & 6500.00 | & 120.00 | 720.00 | 600.00 5.5 S 21.60 | 118.80| 10.00( & 55.00 (% 10.00| 65.00] S 53.80 $ 1,425.60 | & 660.00 | & 120.00 | 730.00 | 645.60 6 S 21.20 | 127.20| $ 10.00( & 60.00| S 10.00| 70.00| $ 57.20| 1,526.40 | & 720.00 | & 120.00 | 840.00 | 686.40 6.5 g 20.80 | & 135.20 | 10.00( 56.00 [ S 10.00| 75.00| 60.20| $ 1,622.40 | & 780.00 | & 120.00 | 900.00 | 722,40 7 g 2040 | & 142.80 | 10.00( 70.00 | $ 10.00| 80.00| 62.80 | 1,713.60 | & 840.00 | 120.00 | 960.00 | $ 753.60 7.5 g 20.00 | & 150.00 | $ 10.00( 75.00 | $ 10.00| 85.00| $ 65.00| 1,200.00 | & 900.00 | 120.00 | 1,020.00 | $ 780.00 3 g 19.60 | & 156.80 | $ 10.00( 80.00 | $ 10.00| 90.00| 66.80 | $ 1,881.60 | & 960.00 | 120.00 | 1,080.00 | $ 801.60 8.5 S 19.20 | 136.20| 10.00( & 85.00| 5 10.00| 95.00| 68.20| 1,958.40 | & 1,020.00 | & 120.00 | 1,140.00 | $ 818.40 9 S 18.80 | 169.20 | 10.00( & 90.00| S 10.00] 100.00| 69.20| 2,030.40 | & 1,080.00 | & 120.00 | 1,200.00 | $ 830.40 9.5 S 1840 | S 174.80| S 10.00( & 95.00| S 10.00] 105.00| $ 69.80| 2,097.60 | & 1,140.00 | $ 120.00 | 1,260.00 | $ 837.60 10 S 13.00 | 180.00| 10.00( & 100.00| $ 10.00] 110.00| 70.00| 2,160.00 | & 1,200.00 | & 120.00 | 1,320.00 | $ 840.00 10.5 5 17.60 | & 184.80 | $ 10.00| $ 105.00| S 10.00( $ 115.00| 69.80| $ 2,217.60 | & 1,260.00 | & 120.00 | 1,380.00 | $ 837.00 11 g 17.20 | & 189.20 | 10.00( 110.00| $ 10.00| $ 120.00| $ 69.20| 2,270.40 | & 1,320.00 | & 120.00 | 1,440.00 | 830.40 11.5 g 16.80 | & 193.20 | 10.00( 115.00 | $ 10.00| $ 125.00| 68.20| 2,318.40 | & 1,380.00 | & 120.00 | 1,500.00 | $ 818.40 12 g 16.40 | & 196.80 | $ 10.00( 120.00| $ 10.00| $ 130.00| $ 66.80 | $ 2,361.60 | S 1,440.00 | & 120.00 | 1,560.00 | 801.60 125 S 16.00 | 200.00| S 10.00( & 125.00| $ 10.00] 135.00] 65.00 2,400.00 | $ 1,500.00 | $ 120.00 | 1,620.00 | $ 780.00 13 S 15.60 | 202.80| S 10.00( & 130.00| $ 10.00] 140.00| 62.80| 2,433.60 | & 1,560.00 | & 120.00 | 1,680.00 | $ 753.60 135 S 15.20 | & 205.20| 10.00( & 135.00| $ 10.00] 145.00| 60.20| 2,462.40 | & 1,620.00 | & 120.00 | 1,740.00 | $ 722.40 14 S 14.80 | 207.20| 10.00| & 140.00| $ 10.00] 150.00| $ 57.20| $ 2,436.40 | & 1,680.00 | & 120.00 | 1,800.00 | $ 686.40 Deluxe Boxes Profit Maximization ( Columns C to H obtain from Project 2) Annual information ( for 12 Months) Variable Cost | Fixed cost per Total Cost Deluxe boxes sold per month Revenue (price x Variable Cost Monthly Profit Price (cost per unit month (Fixed + Annual Revenue Annual VC Annual FC Annual Total Annual Profit (millions) volume) per Deluxe box (revenue - all costs) x volume) (millions) Variable) (millions) (millions) (millions) Costs (millions) (millions 1 30.00 $ 30.00 $ 20.00 $ 20.00 $ 3.00 $ 23.00 $ 7.00 S 360.00 $ 240.00 $ 36.00 S 276.00 S 34.00 1.2 29.50 $ 35.40 $ 20.00 $ 24.00 $ 3.00000 $ 27.0000 8.40 $ 424.80 $ 288.00 $ 36.00 $ 324.00 $ 100.80 1.35 29.00 $ 39.15 $ 20.00 $ 27.00 $ 3.00000 30.0000 |$ 9.15 $ 469.80 $ 324.00 $ 36.00 $ 360.00 109.80 1.5 28.50 $ 42.75 $ 20.00 $ 30.00 $ 3.00000 $ 33.0000 $ 9.75 $ 513.00 $ 360.00 $ 36.00 $ 396.00 $ 117.00 1.55 $ 28.00 $ 43.40 $ 20.00 $ 31.00 $ 3.00000 $ 34.0000 $ 9.40 $ 520.80 $ 372.00 36.00 408.00 $ 112.80 1.6 27.50 $ 44.00 $ 20.00 $ 32.00 $ 3.00000 $ 35.0000 $ 9.00 $ 528.00 $ 384.00 $ 86.00 $ 420.00 108.00 1.65 27.00 $ 14.55 $ 20.00 $ 33.00 $ 3.00000 36.0000 $ 8.55 $ 534.60 $ 396.00 $ 36.00 $ 432.00 $ 102.60 1.7 26.50 $ 45.05 $ 20.00 34.00 $ 3.00000 $ 37.0000 $ 8.05 $ 540.60 $ 408.00 $ 36.00 $ 444.00 $ 96.60 1.75 26.00 $ 45.50 $ 20.00 $ 35.00 $ 3.00000 $ 38.0000 |$ 7.50 $ 546.00 $ 420.00 $ 36.00 $ $ 90.00 1.8 25.50 $ 45.90 $ 20.00 $ 36.00 $ 3.00000 39.0000 $ 6.90 $ 550.80 $ 132.00 $ 36.00 $ 168.00 82.80 1.85 25.00 $ 46.25 $ 20.00 $ 37.00 $ 3.00000 $ 40.0000 |$ 6.25 $ 555.00 $ 444.00 36.00 S 480.00 $ 75.00 1.9 24.50 $ 46.55 $ 20.00 $ 38.00 $ 3.00000 $ 41.0000 $ 5.55 $ 558.60 $ 456.00 $ 36.00 $ 492.00 $ 66.60 1.95 24.00 $ 46.80 $ 20.00 $ 39.00 3.00000 42.0000 $ 4.80 $ 561.60 $ 168.00 36.00 $ 504.00 57.60 2 23.50 $ 17.00 $ 20.00 40.00 $ 3.00000 S 43.0000 $ 4.00 $ 564.00 $ 480.00 36.00 $ 516.00 S 48.00 2.05 $ 23.00 $ 47.15 $ 20.00 $ 41.00 $ 3.00000 $ 44.0000 $ 3.15 $ 565.80 $ 492.00 $ 36.00 $ 528.00 $ 37.80 2.1 $ 22.50 $ 47.25 $ 20.00 $ 42.00 $ 3.00000 $ 45.0000 $ 2.25 $ 567.00 $ 504.00 $ 36.00 $ 540.00 $ 27.00 2.15 $ 22.00 $ 47.30 $ 20.00 $ 43.00 $ 3.00000 $ 46.0000 $ 1.30 $ 567.60 $ 516.00 $ 36.00 $ 552.00 $ 15.60 2.2 S 21.50 $ 47.30 $ 20.00 $ 44.00 $ 3.00000 $ 47.0000 $ 0.30 $ 567.60 $ 528.00 36.00 $ 564.00 $ 3.60 2.25 21.00 $ 47.25 $ 20.00 $ 45.00 $ 3.00000 | $ 48.0000 $ 0.75 $ 567.00 $ 540.00 36.00 $ 576.00 $ 9.00