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 $23 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. 4)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 S 950.40 | 316.00 | 1,166.40 Subtract: Fixed Costs S 16.84 | 83.50 | 100.34 Equals: Operating Profit 5 933.56 | & 132.50 | & 1,066.06 Operating Profit % (based on revenue) 45.98% 32.01% 43.61% Contribution Margin % 46.81% 52.17% A7.71% 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 spaces). 1) How much additional operating profit (in percentage) will be required from the Sustainable Deluxe Boxes to meet the same percentage as the Standard Boxes are generating, given the percentage that can currently be achieved on Sustainable Deluxe Boxes 46.81%|See Question 1 32.01% 52.17%|5ee Q 1 above Required profit Subtract: Existing profit Equals: Difference in additional profit reguired 13.97% -5.36% 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 spaces Using Operating Profit % Using Gross Profit % Revenue % 100.00% 100.00% Subtract: Required Operating Profit 45.98% 46.81% Equals: Cost % 54.02% 53.19% 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) 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 S 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 S 28.95 Question 5 Required: Prove that your calculation in Q 4 is correct. Complete the grey boxes. | Using Contribution Margin % Proof: Total {3) Total () Revenue 5 521.09 Subtract: Variable Costs S 198.00 Equals: Contribution Margin S 323.09 Subtract: Fixed Costs S 83.50 Operating Profit S 239.59 Operating Profit % 45.98% |(1uestic-n 6 | The marketing manger is concerned that the change could have a significant impact on sales as customers may see the sustainable boxes as an inferior product for which they still have to pay only a little bit less than the original price of the Deluxe Boxes. How many boxes would the company have to sell to break even on the new Sustainable Deluxe Boxes based on the new selling price? Complete the grey boxes. S Per unit Sustainable Deluxe Boxes Using Gross Profit % Selling price Less: Variable costs Unit Contribution Magin Fixed Costs Breakeven Quantity Break-even Value