The ability to price, market, and provide products and services helps to maximize the profit of a company. Learning these skills will help you improve the overall functioning of the company and your skills as a business owner, professional, and/or student.Read the following scenarioand complete thequestions posed below.

Scenario

Mirabel Manufacturing is a small but growing company that manufactures and sells marine sonar equipment. They employee a national sales force and their primary customers are marine retailers and boat dealerships. The company has expanded over the last 5 years and Paul Mirabel, the founder and CEO has become concerned that he no longer has a clear picture of their cost structure. He calls his CFO, Mary Jane Montgomery in for a meeting.

"Mary Jane, I am concerned that I am not current on our cost structure and how that is impacting our bottom line," Paul begins.

"Well, Paul, the company has grown considerably over the past 5 years, so I'm not surprised that you feel a little disconnected with how things are going," Mary Jane replied. She continued "In fact, I've been meaning to talk to you about a couple of big items such as increasing the sales commission to 15%. We've lost two of our best account managers in the last 9 months. It seems like we are behind the curve paying only 12% on gross sales."

"What do you mean we are behind the curve," Paul replied angrily. "We have always been the leader in every aspect of our business."

"Well, that may have been the case in the past, Paul, but frankly we need to step up our compensation package to stay competitive," Mary Jane replied. She continued, "And that's not everything. I met with Frank Jacobs from marketing and he said we need to have a bigger presence at the trade show in March. He told me he would need about $650,000 added to the marketing budget to support new marketing materials."

"Come on, Mary Jane, how can we do that when we are going to have to increase commission?" He continued, "I spoke with Dan Clark in production and he indicated that we have two pieces of equipment that need to be replaced by the end of the quarter and that's going to set us back almost $1.2 million."

Mary Jane shook her head. "Paul, I hate to bring this up but while we are talking costs, but Bob in purchasing stopped by the office and dropped off some revised cost information - it looks like several of our suppliers are talking about significant price increases by the end of the year."

Paul slumped in his chair. "This is a mess, Mary Jane. Increasing commissions, new equipment, materials price increases and marketing expenses all at once. Even if Frank Mallow is correct that we should see a 10% increase in sales for the coming year, I just don't see how we can make this work. We have to maintain enough profit to keep the shareholders happy and I can't sleep when we dip below that $2 million margin of safety."

Mary Jane gathered up her papers. "Before you get too distressed, let me put together some figures and let's see what this looks like on paper. I'll get back to you by the end of the week. In the meantime, stay positive, we'll find the best solution."

The following income and cost data for Mirabel is provided:

Mirabel Manufacturing

Budgeted Income Statement

For the Year Ending December 31

Sales

$ 36,750,000

Cost of goods sold:

Variable

$ 13,300,000

Fixed

$ 9,300,000

Gross Margin

$ 14,150,000

Selling & Administrative

Commissions

$ 4,410,000

Fixed Marketing Expenses

$ 1,350,000

Fixed Administrative

$ 6,000,000

Net Operating Income

$ 2,390,000

Model 101

Model 201

Model 301

Normal Annual Sales Volume

16,000

19,000

11,000

Unit Selling Price

$ 650

$ 750

$ 1,100

Variable expense per unit

$ 250

$ 200

$ 500

Questions

(note each of the following questions is independent of each other)

1. What is Mirabel's over-all break-even point in sales dollars?
2. Assume that sales revenue remains constant, what is the impact on break-even and the margin of safety if Paul takes Mary Jane's advice and increases sales commission to 15%?
3. If Mirabel purchases the new equipment for $1,200,000, it will increase fixed costs by 10% but will decrease the variable cost per unit for all 3 models by 5%. What will Mirabel's new break-even point be?

Report

Prepare a report from Mary Jane to Don explaining how these changes will affect Mirabel's overall cost structure. For those changes that are controllable, make a recommendation considering the uncontrollable cost changes. Be certain to consider not only the company's break-even point, but also the desired margin of safety.