The vice-president of sales and marketing, Madison Tremblay, is trying to plan for the coming year in terms of production needs to meet the forecasted sales. The board of directors is very supportive of any initiatives that will lead to increased profits for the company in the upcoming year. Part 1

Instructions

(a) Waterways markets a simple water controller and timer that it mass produces. During 2016, the company sold 350,000 units at an average selling price of $8.00 per unit. The variable expenses were $1,575,000, and the fixed expenses were $800,000.

1. What is the product's contribution margin ratio?

2. What is the company's break-even point in units and in dollars for this product?

3. What is the margin of safety, both in dollars and as a ratio?

4. If management wanted to increase income from this product by 10%, how many additional units would the company have to sell to reach this income level?

5. If sales increase by 71,000 units and the cost behaviours do not change, how much will income increase on this product?

(b) Waterways is considering mass producing one of its special-order screens. This would increase variable costs for all screens by an average of $0.71 per unit. The company also estimates that this change could increase the overall number of screens sold by 10%, and the average sales price would increase by $0.25 per unit. Waterways currently sells 491,740 screen units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,661,352 variable and $794,950 fixed.

1. If Waterways begins mass producing its special-order screens, how would this affect the company?

2. If the average sales price per screen unit did not increase when the company began mass producing the screen units, what would be the effect on the company?

Part 2

Waterways has a sales mix of sprinklers, valves, and controllers as follows:

Instructions
(a) Determine the sales mix based on unit sales for each product.
(b) Using the annual expected sales for these products, determine the weighted-average unit contribution margin for these three products. (Round to two decimal places.)
(c) Assuming the sales mix remains the same, what is the break-even point in units for these products?
Part 3
The section of Waterways that produces controllers for the company provided the following information:

Instructions
(a) Using this information for the controllers, determine the contribution margin ratio, the degree of operating leverage, the break-even point in dollars, and the margin of safety ratio for Waterways Corporation on this product.
(b) What does this information suggest if Waterways' cost structure is the same for the company as a whole?

Transcribed Image Text:

Annual expected sales: Sale of sprinklers Sale of valves Sale of controllers 450,000 units at $26.50 1,500,000 units at $11.20 50,000 units at $42.50 Variable manufacturing cost per unit: Sprinklers Valves Controllers $13.96 7.95 $29.75 Fixed manufacturing overhead cost (total) Variable selling and administrative $760,000 expenses per unit: Sprinklers Valves Controllers $1.30 $0.50 S3.41 $1,600,000 Fixed selling and administrative expenses (total) Sales (in units) for month of February Variable manufacturing cost per unit Sales price per unit Fixed manufacturing overhead cost (per month for controllers) Variable selling and administrative expenses per unit Fixed selling and administrative expenses (per month for controllers) 4,000 $9.75 $42.50 $81,000 $3.41 $13,122