Westboro, Inc_CVP Analysis
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July 6, 2020Laurentian Lodge_CVP Analysis
July 6, 2020Westboro, Inc_CVP Analysis
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Westboro, Inc. makes table top two burner cookers used South America and Central America. Recently, sales have been declining as more families can now afford regular size stoves complete with four burners and an oven. The company’s contribution format income statement for the most recent year is given below:
| Sales (15,000 units x $60) | $900,000 |
| Variable expenses | 675,000 |
| Contribution margin | 225,000 |
| Fixed expenses | 245,000 |
| Net operating income (loss) | (20,000) |
Required: (Round to the nearest $ as needed)
1. Compute the company’s CM ratio (2 points)
2. Compute the company’s break-even point in units (4 points)
3. Compute the company’s break-even point in sales dollars (4 points)
4. The president of the company believes a $17,000 increase in the annual advertising budget will result in an increase in quarterly sales of 1,000 units. If the president is right what will be change in annual operating income? (Must show work to support answer) (7 points)
5. Refer back to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of only $10,000 in the advertising budget, will cause unit sales to increase by 50%. Prepare the new contribution format income statement assuming these changes were adopted. (10 points)
6. Refer back to the original data. The Marketing Department thinks that a fancy design on the stove top would increase sales. The only cost associated with the new design would be variable cost of $2.00 per unit. Assuming no other changes, how many units would have to be sold each year to earn a profit of $5,500? (10 points)
7. Refer back to the original data. By automating certain operations, the company could reduce variable costs by $3 per unit. However, fixed costs would increase annually by $45,000.
1. Compute the new CM ratio (6 points)
2. Compute the new break-even point in units (4 points)
3. Compute the new break-even point in sales dollars (4 points)
4. Assume the company expects to sell 25,000 units next year. Prepare two contribution margin format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.) The company is in the 30% tax bracket. (24 points)
