Question 9

1) Summarize the information for TrueBeat from Q9 & 10 of HW1.1 assuming they produce and sell 1,000 drum sets during the year. Remember to use 2 decimals for "per unit" values. Total Dollars True Beat - Summarized connect given data Average Cost per Unit Direct materials 19 Direct labor $ 90 Variable manufacturing overhead $ 35 Fixed manufacturing overhead $ Fixed selling & administrative expense $ Variable selling & administrative expenses 25 Sales price per unit 516 239,000 7000 + 16000 + 42.000 33,000+ 36000+ 170,000 . 2) Assume, due to the significant success of the drum sets, TrueBeat has obtained a contract to provide drum sets to a national merchandising chain. This contract is expected to increase TrueBeat's sales over the next 3 years. Current operations have a relevant range of 500 to 1,800 drum sets. TrueBeat's anticipates selling 3,000 units in Year 2, 5,000 units in Year 3 and 6,000 units in Year 4. Making the following cost changes, TrueBeat will increase their relevant range of production to between 4,000 and 8,000 drum sets. This significant increase to production will stair-step some of their costs. Specifically, the company will have to purchase additional equipment that will increase their machinery depreciation expense by 50% (Fixed overhead. The new equipment will allow TrueBeat to produce up to 10,000 drum sets a year. With increased production levels, TrueBeat will need to pay shift premium to assembly workers such that the average Direct labor will increase by $18 a unit. Additionally, production supervisor will be hired for $120,000 (fixed overhead). Additionally, the company providing factory maintenance services has agreed to a new contract. The new contract will include a fixed component (overhead) equal to half of the original flat fee and a variable component (overhead) that will be $0.25 per assembly wage dollars The company needs to increase its sales staff. Rather than paying their sales staff commission only, TrueBeat will pay sales staff a flat salary (fixed S&A) equal to twice the amount paid in Year 1 and a reduced commission per drum set equal to 50% of the previous commission rate. All other costs are considered consistent and within relevant range for production of 4,000 to 8.000 units Use the information provided above to adjust amounts from the table in 1). Include the adjusted amounts in the table below TrueBeat adjusted summarized data for production 4,000 to 8,000 units Adjust summarized data Average Cost Total per Unit Dollars Direct materials $ TE Direct Labor $ Variable manufacturing overhead Fixed manufacturing overhead 7000+ 0.63.115.100 Fixed selling & administrative expense 170,066 + 33,00 72,50 Variable selling & administrative expense 13.5 sa Sales price per unit Note: The table above may be submitted early for verification. Upload it to the submission" drop box on D2L, email or text a photo or PDF to Teri and she will look at it before you continue with the project. 3) TrueBeat's management will need to produce 4,000 units in Years 2 and 3 (to meet relevant range) and 6,000 units in Year 4. However, they anticipate selling only 3,000 units in Ycar 2 but 5,000 units in Years 3 and 6,000 units in Year 4. They will have to carry inventory produced in Year 2 until it is sold in Year 3. Note: Net Operating Income, or NOI, for this course is essentially Income before interest or tax expense and represents the operationally controlled components of Net Income. a) Using variable costing and contribution margin income statement format, prepare predictive income statements for Years 2, 3 and 4 below. TrueBeat Income Statement (Variable Costing) For Years ending December 31 Year 2 Year 3 Year 4 Sales revenue 1548.000 2.580.000 3.090.000 Variable production costs 56700 945. DOO 134. ODD Variable S&A expenses 37.500 62.500 75.DDD Contribution Margin 943 50 1.572.500 1882. ADD Fixed Overhead 1981 198. DDO 192.000 Fixed S&A expenses 275.00 275,000 275.000 Net Operating Income 470.500 b) Using absorption costing, prepare an absorption costing income statements for TrueBeat for Years 2, 3 and 4. Sales revenue Cost of Goods Sold Gross Margin S&A expenses Nct Oncrating Income TrueBeat Income Statement Absorption Costing) For Years ending December 31 Year 2 Year 3 1.54RADDO 2.580 DOO 715 1912 500 92 2.5D L. 397.500 32.500 337.500 520 DAL Year 4 2196 L.332.000 1.764 250.000 INTL.DDD c) Do you think TrueBeat's decision to maintain drum sets inventory from year 2 until they are sold in year 3 was a good decision? Use complete sentences and 30 to 50 words in your answer. mersin - Total 4) TrucBcat expects production and sales levels to remain constant from year 4 onward at 6,000 drum sets. Write a Profit Formula for TrueBeat's operations using variable costing. NOI - Q x CM unit - FC, where Q represents the number of units produced and sold, CM unit is the contribution margin per unit and FC is the total fixed expenses. a) Profit formula Contribution margin: Total Sales - Total variable expenses, Profit Contribution b) Complete chart assuming the same number of units will be produced and sold. feed expenses Units Sales Variable Fixed produced/sold Revenue Expenses Expenses Profit/NOI 4,000 2.064.00 675.000 20400 LORD 5,000 250.000 845,000 304,000 1,43LONA 6.000 3.096,00D L. 14. DAN 778 7.000 3.612. DO ILABDA 304 12.125.000 304.00 c) Prepare a Cost-Volume-Profit graph for TrueBeat Company (you can use the graph at the end of the assignment or create your own) i) Label both the x and y axis using appropriate increments. Dollar values should be used for the y axis and number of units for the x axis. ii) Plot the Fixed Expense line. Label it. iii) Plot the Sales Revenue line and label it. iv) Plot the Total Expense line and label it. v) Indicate the Break-even Point on the graph and label it. vi) Shade and label the portion of the graph that indicates the company's positive profit. 5) Base scenario calculations. Using the Profit Formula calculated in 5) above, calculate the following assuming Trellcat produces and sells 6,000 units as their hessenario Sales Revenue IL 1.400 Net Operating Income 1,778. Contribution Margin L.02. Contribution Margin Contribution Margin percent 2.0/7.001,0 +61.15 Break-even in units 30./2011/1) - 4.17. Break-even in dollars 3044/67.25620 Margin of safety in units 6.100-176 5.124 Margin of safety percent ( 1.1.0/11 15.07 Margin of safety in dollars 7., -452.045 2,643,755 Degree of Operating Leverage 2,022,/ 1.778,- 1.17 Looking at changes: TrueBeat is not confident their expenses will hold in year 4. Management wants to examine the potential impact of the following situations. Assume cach situation independent of one another. The Profit Formula and 6,000 units produced and sold for Year 4 as your "base" scenario 6) Increase to costs: The production manager is anticipating inflation and other increase that will result in total variable expenses increasing by 20%. a) What will the new profit formula be? Net Profit (Net sales - Lost of Production) b) What will the CM ratio and Break-Even point in units be with the labor increase? Note - Requirement asks for CM ratio, NOT contribution margin in dollars or contribution per unit. Toba Salsa 5 16 1000$16.000 CM ratis. 516,000 58,000 Variable Cesta 33,000+ (25too units) = $58,000 5lbrooo Break Fren Point 415,000/ (516-5): c) If they produce and sell the same number of units for Year 4, what will their new Net Operating 90-11 Income, NOI, be? 516,000 - 415,000 - 58,000 = 43,000 -0.8875 d) How many units will TrueBeat need to sell to maintain the same operating income as originally planned for Year 4? 1000 units e) Assume TrueBeat Company need to make a minimum profit of $1,000,000 to keep its creditors and investors happy. What minimum sales price will they need to charge if they produce and sell 6,000 units? Hint: Remember that CM = Sales price - Variable expenses. f) Conclusion: Use your calculation above, should TrucBcat be concemed about future costs increases? Make sure your answer uses complete sentences and includes 30 to 50 words to support your answer. riskg factor 7) Changing sales price: Marketing research indicates that TrueBeat Company can sell more units of its product if they lower their sales price by 10% per unit. Remember to treat this scenario as independent from the items considered in 6. a) Calculate the new sales price and (ii) contribution margin per unit. D) new sales price 516-101 646 ii) CM per unit iii) What will the new Profit formula be? Profit Formula (New sales price per unit variable cost) fred cost, profit b) How many units will they need to sell to make the same operating income (NOI) as originally projected for year 4 base assumption)? 43000 304150 /15.4 75 witte c) How many units will they need to sell to break-even at the new sales price? 304000/295.4 = 1024 units d) If TrueBeat Company can sell 20% more units (2 times original units) with the decreased sales price, how much operating income will they make? 590,500 - 309.000 . 286.800 e) Conclusion: Using the information calculated above, should TrueBeat lower their sales price? Why or why not? Will their relevant range be an issue for this decision? Your answer should include full sentences and 30 to 50 words. True Beat should mostly not consider to place to get price if they estimate that their rates wall increase, becquce with a reduction of price, they have to sell more units than usual to break even which is a 8) Increase Fixed Costs: TrueBeat's management is also considering purchasing additional advertising is a huge company purchase the additional advertising? Your answer should use complete sentences and beden to prode more bat comida contain 30 to 50 words. Support your answer with calculations of at least 2 of the following items if they cout seul maintain the same Net Income as originally assumed for year 4. You may also use other calculations unite that you feel are relevant. Remember to treat this scenario as independent from the items considered to bright idea in 6) and 7) True beat's mana pment should ineux additional advertising loveduce coding price si are selling expence as it will give more operating profit. Their profit is increased neates inft by $29400. Not increased fand cost Increased fired cost 304000/516-1675 97 niti 3440001516-164 941 units 9) New Plant? Because TrueBeat's capacity is limited to 8,000 units in their current production facility, management would like to explore the impact of building a new production facility. The company is considering a new production facility and equipment that will decrease their variable expenses by 30% but increase fixed expenses by 50%. TrueBeat still plans to produce and sell the same number of units in Year 4 (base). The new plant will give them a relevant range of 5,000 to 12,000 units. a) If the new production facility is built, what would be the company's new (1) contribution margin per unit, (ii) fixed expenses and (ii) the new profit formula? Complete the table below. i) New CM per unit ii) New Fixed expenses iii) New profit formula Under New production facility New Break-even Units Sales Revenue NOI New Year 4 6.000 -0- b) Assume TrueBeat sells the same units as planned for Year 4 in the new plant, calculate the new margin of safety in (i) units) (ii) dollars and (iii) percent. i) MoS units ii) MoS dollars iii) MoS percent Has margin of safety improved or declined? Explain/comment in 10 to 30 words. c) Calculate the degree of operating leverage. Has operating leverage improved or declined from the "base" calculation in 9)? Discuss in 10 to 30 words. d) Conclusion: If you were a member of top management, would you have been in favor of constructing the new plant? Explain in 30 to 50 words [The following information applies to the questions displayed below.] Listed here are the total costs associated with the production of 1,000 drum sets manufactured by TrueBeat. The drum sets sell for $516 each. Costs 1. Plastic for casing-$19,000 2. Wages of assembly workers--$90,000 3. Property taxes on factory-$7,000 4. Accounting staff salaries-$33,000 5. Drum stands (1,000 stands purchased)-$35,000 6. Rent cost of equipment for sales staff-$36,000 7. Upper management salaries--$170,000 8. Annual flat fee for factory maintenance service-$16,000 9. Sales commissions--$25 per unit 10. Machinery depreciation, straight-line--$42,000 1) Summarize the information for TrueBeat from Q9 & 10 of HW1.1 assuming they produce and sell 1,000 drum sets during the year. Remember to use 2 decimals for "per unit" values. Total Dollars True Beat - Summarized connect given data Average Cost per Unit Direct materials 19 Direct labor $ 90 Variable manufacturing overhead $ 35 Fixed manufacturing overhead $ Fixed selling & administrative expense $ Variable selling & administrative expenses 25 Sales price per unit 516 239,000 7000 + 16000 + 42.000 33,000+ 36000+ 170,000 . 2) Assume, due to the significant success of the drum sets, TrueBeat has obtained a contract to provide drum sets to a national merchandising chain. This contract is expected to increase TrueBeat's sales over the next 3 years. Current operations have a relevant range of 500 to 1,800 drum sets. TrueBeat's anticipates selling 3,000 units in Year 2, 5,000 units in Year 3 and 6,000 units in Year 4. Making the following cost changes, TrueBeat will increase their relevant range of production to between 4,000 and 8,000 drum sets. This significant increase to production will stair-step some of their costs. Specifically, the company will have to purchase additional equipment that will increase their machinery depreciation expense by 50% (Fixed overhead. The new equipment will allow TrueBeat to produce up to 10,000 drum sets a year. With increased production levels, TrueBeat will need to pay shift premium to assembly workers such that the average Direct labor will increase by $18 a unit. Additionally, production supervisor will be hired for $120,000 (fixed overhead). Additionally, the company providing factory maintenance services has agreed to a new contract. The new contract will include a fixed component (overhead) equal to half of the original flat fee and a variable component (overhead) that will be $0.25 per assembly wage dollars The company needs to increase its sales staff. Rather than paying their sales staff commission only, TrueBeat will pay sales staff a flat salary (fixed S&A) equal to twice the amount paid in Year 1 and a reduced commission per drum set equal to 50% of the previous commission rate. All other costs are considered consistent and within relevant range for production of 4,000 to 8.000 units Use the information provided above to adjust amounts from the table in 1). Include the adjusted amounts in the table below TrueBeat adjusted summarized data for production 4,000 to 8,000 units Adjust summarized data Average Cost Total per Unit Dollars Direct materials $ TE Direct Labor $ Variable manufacturing overhead Fixed manufacturing overhead 7000+ 0.63.115.100 Fixed selling & administrative expense 170,066 + 33,00 72,50 Variable selling & administrative expense 13.5 sa Sales price per unit Note: The table above may be submitted early for verification. Upload it to the submission" drop box on D2L, email or text a photo or PDF to Teri and she will look at it before you continue with the project. 3) TrueBeat's management will need to produce 4,000 units in Years 2 and 3 (to meet relevant range) and 6,000 units in Year 4. However, they anticipate selling only 3,000 units in Ycar 2 but 5,000 units in Years 3 and 6,000 units in Year 4. They will have to carry inventory produced in Year 2 until it is sold in Year 3. Note: Net Operating Income, or NOI, for this course is essentially Income before interest or tax expense and represents the operationally controlled components of Net Income. a) Using variable costing and contribution margin income statement format, prepare predictive income statements for Years 2, 3 and 4 below. TrueBeat Income Statement (Variable Costing) For Years ending December 31 Year 2 Year 3 Year 4 Sales revenue 1548.000 2.580.000 3.090.000 Variable production costs 56700 945. DOO 134. ODD Variable S&A expenses 37.500 62.500 75.DDD Contribution Margin 943 50 1.572.500 1882. ADD Fixed Overhead 1981 198. DDO 192.000 Fixed S&A expenses 275.00 275,000 275.000 Net Operating Income 470.500 b) Using absorption costing, prepare an absorption costing income statements for TrueBeat for Years 2, 3 and 4. Sales revenue Cost of Goods Sold Gross Margin S&A expenses Nct Oncrating Income TrueBeat Income Statement Absorption Costing) For Years ending December 31 Year 2 Year 3 1.54RADDO 2.580 DOO 715 1912 500 92 2.5D L. 397.500 32.500 337.500 520 DAL Year 4 2196 L.332.000 1.764 250.000 INTL.DDD c) Do you think TrueBeat's decision to maintain drum sets inventory from year 2 until they are sold in year 3 was a good decision? Use complete sentences and 30 to 50 words in your answer. mersin - Total 4) TrucBcat expects production and sales levels to remain constant from year 4 onward at 6,000 drum sets. Write a Profit Formula for TrueBeat's operations using variable costing. NOI - Q x CM unit - FC, where Q represents the number of units produced and sold, CM unit is the contribution margin per unit and FC is the total fixed expenses. a) Profit formula Contribution margin: Total Sales - Total variable expenses, Profit Contribution b) Complete chart assuming the same number of units will be produced and sold. feed expenses Units Sales Variable Fixed produced/sold Revenue Expenses Expenses Profit/NOI 4,000 2.064.00 675.000 20400 LORD 5,000 250.000 845,000 304,000 1,43LONA 6.000 3.096,00D L. 14. DAN 778 7.000 3.612. DO ILABDA 304 12.125.000 304.00 c) Prepare a Cost-Volume-Profit graph for TrueBeat Company (you can use the graph at the end of the assignment or create your own) i) Label both the x and y axis using appropriate increments. Dollar values should be used for the y axis and number of units for the x axis. ii) Plot the Fixed Expense line. Label it. iii) Plot the Sales Revenue line and label it. iv) Plot the Total Expense line and label it. v) Indicate the Break-even Point on the graph and label it. vi) Shade and label the portion of the graph that indicates the company's positive profit. 5) Base scenario calculations. Using the Profit Formula calculated in 5) above, calculate the following assuming Trellcat produces and sells 6,000 units as their hessenario Sales Revenue IL 1.400 Net Operating Income 1,778. Contribution Margin L.02. Contribution Margin Contribution Margin percent 2.0/7.001,0 +61.15 Break-even in units 30./2011/1) - 4.17. Break-even in dollars 3044/67.25620 Margin of safety in units 6.100-176 5.124 Margin of safety percent ( 1.1.0/11 15.07 Margin of safety in dollars 7., -452.045 2,643,755 Degree of Operating Leverage 2,022,/ 1.778,- 1.17 Looking at changes: TrueBeat is not confident their expenses will hold in year 4. Management wants to examine the potential impact of the following situations. Assume cach situation independent of one another. The Profit Formula and 6,000 units produced and sold for Year 4 as your "base" scenario 6) Increase to costs: The production manager is anticipating inflation and other increase that will result in total variable expenses increasing by 20%. a) What will the new profit formula be? Net Profit (Net sales - Lost of Production) b) What will the CM ratio and Break-Even point in units be with the labor increase? Note - Requirement asks for CM ratio, NOT contribution margin in dollars or contribution per unit. Toba Salsa 5 16 1000$16.000 CM ratis. 516,000 58,000 Variable Cesta 33,000+ (25too units) = $58,000 5lbrooo Break Fren Point 415,000/ (516-5): c) If they produce and sell the same number of units for Year 4, what will their new Net Operating 90-11 Income, NOI, be? 516,000 - 415,000 - 58,000 = 43,000 -0.8875 d) How many units will TrueBeat need to sell to maintain the same operating income as originally planned for Year 4? 1000 units e) Assume TrueBeat Company need to make a minimum profit of $1,000,000 to keep its creditors and investors happy. What minimum sales price will they need to charge if they produce and sell 6,000 units? Hint: Remember that CM = Sales price - Variable expenses. f) Conclusion: Use your calculation above, should TrucBcat be concemed about future costs increases? Make sure your answer uses complete sentences and includes 30 to 50 words to support your answer. riskg factor 7) Changing sales price: Marketing research indicates that TrueBeat Company can sell more units of its product if they lower their sales price by 10% per unit. Remember to treat this scenario as independent from the items considered in 6. a) Calculate the new sales price and (ii) contribution margin per unit. D) new sales price 516-101 646 ii) CM per unit iii) What will the new Profit formula be? Profit Formula (New sales price per unit variable cost) fred cost, profit b) How many units will they need to sell to make the same operating income (NOI) as originally projected for year 4 base assumption)? 43000 304150 /15.4 75 witte c) How many units will they need to sell to break-even at the new sales price? 304000/295.4 = 1024 units d) If TrueBeat Company can sell 20% more units (2 times original units) with the decreased sales price, how much operating income will they make? 590,500 - 309.000 . 286.800 e) Conclusion: Using the information calculated above, should TrueBeat lower their sales price? Why or why not? Will their relevant range be an issue for this decision? Your answer should include full sentences and 30 to 50 words. True Beat should mostly not consider to place to get price if they estimate that their rates wall increase, becquce with a reduction of price, they have to sell more units than usual to break even which is a 8) Increase Fixed Costs: TrueBeat's management is also considering purchasing additional advertising is a huge company purchase the additional advertising? Your answer should use complete sentences and beden to prode more bat comida contain 30 to 50 words. Support your answer with calculations of at least 2 of the following items if they cout seul maintain the same Net Income as originally assumed for year 4. You may also use other calculations unite that you feel are relevant. Remember to treat this scenario as independent from the items considered to bright idea in 6) and 7) True beat's mana pment should ineux additional advertising loveduce coding price si are selling expence as it will give more operating profit. Their profit is increased neates inft by $29400. Not increased fand cost Increased fired cost 304000/516-1675 97 niti 3440001516-164 941 units 9) New Plant? Because TrueBeat's capacity is limited to 8,000 units in their current production facility, management would like to explore the impact of building a new production facility. The company is considering a new production facility and equipment that will decrease their variable expenses by 30% but increase fixed expenses by 50%. TrueBeat still plans to produce and sell the same number of units in Year 4 (base). The new plant will give them a relevant range of 5,000 to 12,000 units. a) If the new production facility is built, what would be the company's new (1) contribution margin per unit, (ii) fixed expenses and (ii) the new profit formula? Complete the table below. i) New CM per unit ii) New Fixed expenses iii) New profit formula Under New production facility New Break-even Units Sales Revenue NOI New Year 4 6.000 -0- b) Assume TrueBeat sells the same units as planned for Year 4 in the new plant, calculate the new margin of safety in (i) units) (ii) dollars and (iii) percent. i) MoS units ii) MoS dollars iii) MoS percent Has margin of safety improved or declined? Explain/comment in 10 to 30 words. c) Calculate the degree of operating leverage. Has operating leverage improved or declined from the "base" calculation in 9)? Discuss in 10 to 30 words. d) Conclusion: If you were a member of top management, would you have been in favor of constructing the new plant? Explain in 30 to 50 words [The following information applies to the questions displayed below.] Listed here are the total costs associated with the production of 1,000 drum sets manufactured by TrueBeat. The drum sets sell for $516 each. Costs 1. Plastic for casing-$19,000 2. Wages of assembly workers--$90,000 3. Property taxes on factory-$7,000 4. Accounting staff salaries-$33,000 5. Drum stands (1,000 stands purchased)-$35,000 6. Rent cost of equipment for sales staff-$36,000 7. Upper management salaries--$170,000 8. Annual flat fee for factory maintenance service-$16,000 9. Sales commissions--$25 per unit 10. Machinery depreciation, straight-line--$42,000