Question
Working Note-1: Current situation Particulars Amount($) Amount($) Sales 1200000 Less: Variable Cost 1. Cost of goods sold 490000 2. Selling Expenses 135000 3. Administrative Expenses
Working Note-1: Current situation
Particulars | Amount($) | Amount($) |
Sales | 1200000 | |
Less: Variable Cost | ||
1. Cost of goods sold | 490000 | |
2. Selling Expenses | 135000 | |
3. Administrative Expenses | 110000 | 735000 |
Contribution | 465000 | |
Units | 200000 | |
Contribution per unit | 2.325 | |
Fixed Cost | 540000 |
Net Income= 4,65,000-5,40,000=-$75000
Break even point= Fixed cost/contribution per unit= 5,40,000/2.325= 2,32,258 units
PLAN A - Tom has proposed a plan to improve its profitability. Tom feels that the quality of the product could be substantially improved by spending $0.25 more per unit on better raw materials. The selling price per unit could be increased to $6.25. Tom estimates that sales volume will increase by 20%. Compute net income under Toms proposal and the break-even point in dollars.
PLAN-A income statement
Particulars | Amount($) | Amount($) |
Sales | 1500000 | |
Less: Variable Cost | ||
1. Cost of goods sold | 648000 | |
2. Selling Expenses | 162000 | |
3. Administrative Expenses | 132000 | 942000 |
Contribution | 558000 | |
Units | 240000 | |
Contribution per unit | 2.325 | |
Fixed Cost | 540000 | |
Net Income | 18000 |
Break even point = Fixed cost/contribution per unit= 5,40,000/2.325= 2,32,258 units
PLAN B - Jill was a sales and marketing major in college. Jill believes that sales volume can be increased only by an intensive advertising and promotional campaign. She proposed the following plan as an alternative to Toms: (1) increase variable selling expenses to $0.70 per unit, (2) increase the selling price per unit by $0.40, and (3) increase fixed selling expenses by $50,000. Jill based her recommendations based on an old marketing research report that said that sales volume would increase by 30% if these changes were made. Compute net income under Jills proposal and the break-even point in dollars.
PLAN-B income statement
Particulars | Amount($) | Amount($) |
Sales | 1664000 | |
Less: Variable Cost | ||
1. Cost of goods sold | 637000 | |
2. Selling Expenses | 182000 | |
3. Administrative Expenses | 143000 | 962000 |
Contribution | 702000 | |
Units | 260000 | |
Contribution per unit | 2.7 | |
Fixed Cost | 590000 | |
Net Income | 112000 |
.
Break even point = Fixed cost/contribution per unit= 5,90,000/2.70=2,18,518.51 units
Which plan do you believe should be accepted and why? Using good written communication, completely and thoroughly explain your answer.?
Nighthawk Company's Income Statement for the Year Ended December 31, 2021 Sales (200,000 units) $1,200,000 Cost of goods sold 700,000 Gross profit 500,000 Operating expenses Selling $300,000 Administrative 275,000 575,000 Net loss $ (75,000) A cost behavior analysis indicates that 70% of the cost of goods sold are variable, 45% of the selling expenses are variable, and 40% of the administrative expenses are variable. Nighthawk Company's Income Statement for the Year Ended December 31, 2021 Sales (200,000 units) $1,200,000 Cost of goods sold 700,000 Gross profit 500,000 Operating expenses Selling $300,000 Administrative 275,000 575,000 Net loss $ (75,000) A cost behavior analysis indicates that 70% of the cost of goods sold are variable, 45% of the selling expenses are variable, and 40% of the administrative expenses are variable
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