Westboro, Inc_CVP Analysis

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Description

Acounting

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)

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