The president of your company has asked for preliminary analysis to determine what changes in current performance targets are necessary to increase Earnings (EBT) from $46,000 to $90,000.

You will model the current situation, then evaluate alternatives using Cost-Volume analysis techniques. You know the selling price and variable cost of your product as well as the Fixed Costs of your operation. You also know the design, effective and actual output that can be achieved by your organization using existing equipment and processes.

You will work with the selling price, variable cost, fixed costs and output to model a scenario that will achieve the increased earnings target.

Below are some constraints to your model:

1. Modeled output cannot exceed effective output because no changes to equipment or processes are possible

2. Marketing has indicated that demand will exceed effective output as long as the selling price remains below $15.50

3. Waste and efficiency of the existing processes are well managed, therefore decreasing the variable cost per unit by more than $0.80 below the current figure is not possible

4. The organization emphasizes a lean culture and fixed costs for operations are well managed, therefore saving more than 5% is not possible

It is preferred to set less aggressive targets for each performance measure, rather than risk maximizing/minimizing just one or two.

Once you have completed your analysis and established new performance targets, you will provide a summary of the changes you recommend in a short paragraph.

Marking Scheme

Modelling

• The recommended level of production is within constraints /100

• The recommended selling price is within constraints /100

• The recommended variable cost per unit is within constraints /100

• The recommended fixed cost is within constraints /100

• The model achieves the required earnings /200

Summary

• Provide a summary of the changes to performance targets /200

TOTAL /800

Use this template excel layout:

INCOME STATEMENT Revenue Cost of Goods Sold Gross Profit VARIABLES Design Capacity S Effective Capacity S Actual Output S 20,000.00 18,000.00 16,000.00 Operating Expenses Other Expenses Selling Price Cost per Unit S S 14.00 8.00 S (20,000.00) Fixed Costs S 30,000.00