# Kathleen Sebilus Inc._CVP Analysis

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## Description

Kathleen Sebilus Inc.
contribution format income statement for the most recent month is given below:
Sales (47,000 units) \$987,000
Variable
expenses 690,900
Contribution margin 296,100
Fixed
expenses 236,880
Net operating income \$59,220

The industry in which Kathleen Sebilus Inc.
operates is quite sensitive to cyclical movements in the economy. Thus, profits
vary considerably from year to year according to general economic conditions.
The company has a large amount of unused capacity and is studying ways of
improving profits.

Required:
1.
New
equipment has come on the market that would allow Kathleen Sebilus Inc. to
automate a portion of its operations. Variable expenses would be reduced by
\$6.30 per unit. However, fixed expenses would increase to a total of \$532,980
each month. Prepare two contribution format income statements, one showing
present operations and one showing how operations would appear if the new
equipment is purchased. (Input all amounts as positive values except losses
which should be indicated by minus sign. Round your “Per unit”
answers to 2 decimal places. Omit the “\$” and “%” signs in

Present Proposed
Amount Per
Unit % Amount Per Unit %
\$
\$ % \$ \$ %
\$ % \$ %
\$ \$

2. Refer
to the income statements in (1) above. For both present operations and the
proposed new operations, Compute:
a. The degree of operating leverage.
Present
Proposed
Degree
of operating leverage
b. The break-even point in dollars.
Present Proposed
Break-even
point in dollars \$ \$

c. The
margin of safety in both dollar and percentage terms. (Omit the “\$”
and “%” signs in our response.)
Present Proposed
Margin
of safety in dollars \$ \$
Margin
of safety in percentage % %

3.Refer again to the data in (1) above.
As a manager, what factor would be paramount in your mind in deciding whether
to purchase the new equipment? (Assume that ample funds are available to make
the purchase.)

Stock level maintained
Cyclical
movements in the economy
Reserves
and surplus of the company
Performance
of peers in the industry

4. Refer to the
original data. Rather than purchase new equipment, the marketing manager argues
that the companyâ€™s marketing strategy should be changed. Instead of paying
sales commissions, which are included in variable expenses, the marketing
manager suggests that salespersons be paid fixed salaries and that the company
invest heavily in advertising. The marketing manager claims that this new
approach would increase unit sales by 50% without any change in selling price;
the companyâ€™s new monthly fixed expenses would be \$296,100; and its net
operating income would increase by 25%. Compute the break-even point in dollar
sales for the company under the new marketing strategy. (Omit the “\$”