Question

NTM Corporation was formed on January 1, 2013 and the company has been growing steadily since inception. The Chief Financial Officer, Myrna Snowflake, has hired you to perform some cost-volume- profit analysis to determine what changes can be made to increase profitability. She has provided you with the following traditional income statement for 2017. Total sales volume for 2017 was 600,000 units. The relevant range for NTM Corporation is 400,000 – 700,000 units. Requirements:

NTM Corporation Income Statement For the Year Ended December 31, 2017 Sales $ 21,600,000 $ Cost of goods sold: Direct labor Direct material Variable manufacturing overhead Fixed manufacturing overhead Total cost of goods sold 5,400,000 3,240,000 1,944,000 4,200,000 14,784,000 Gross margin 6,816,000 $ Operating expenses: Variable selling expenses Fixed selling expenses Fixed administrative expenses Total operating expenses 1,080,000 1,200,000 2,400,000 4,680,000 Net operating income $ 2,136,000

Total sales volume for 2017 was 600,000 units. The relevant range for NTM Corporation is 400,000 – 700,000 units.

Requirements:

1. (1) Prepare a contribution format income statement for 2017. Calculate the break-even sales dollars and the break-even sales units.

2. (2) The Production Manager believes that by using a lower quality material, the cost of direct material can be reduced by 10% per unit. While he doesn’t expect the change in material quality to be readily apparent, he believes that customers will overlook any change in quality if the product has a lower sales price. He believes that by lowering the sales price by $1.50 per unit, there will be an 8% increase in sales volume. Prepare a contribution format income statement for this alternative. Calculate the break-even sales dollars and the break-even sales units.

3. (3) The Quality Control Manager does not agree with the Production Manager’s suggestion and has a different idea. He believes that an additional piece of equipment can be purchased. The new piece of equipment will allow the company to decrease Direct Labor to 20% of Sales. The new piece of equipment will increase fixed costs by $600,000 per year. The Quality Control Manager also believes an increased marketing effort will lead to additional sales volume. He has proposed spending an additional $10,000 per month on advertising which he believes will lead to an increase in sales volume of 1%. Coupled with an increase in sales price per unit of $0.50, the company should see increase profitability. Prepare a contribution format income statement for this alternative. Calculate the break-even sales dollars and the break-even sales units.

4. (4) The Sales Manager also believes that an additional piece of equipment is the answer to increased profitability. She agrees with the Quality Control Manager that a new piece of manufacturing equipment can lead to cost savings. She has located a similar piece of equipment to that suggested by the Quality Control Manager but at a cost of $500,000. The Sales Manager believes that a decrease in sales price of $5 per unit will increase sales volume by 10%. In addition, she believes the new piece of equipment will allow the company to eliminate some direct labor which will change the revised direct labor percentage to be 15% of sales. With the decrease in direct labor necessary to produce the merchandise, she is proposing laying off three manufacturing managers for a total savings of $450,000. She also believes a change in the Sales Department is necessary and has proposed eliminating all sales commissions and other variable selling costs so that variable selling costs will be totally eliminated but sales salaries will be increased by $75,000 per year. Prepare a contribution format income statement for this alternative. Calculate the break-even sales dollars and the break-even sales units.

5. (5) Prepare a memo to the Chief Financial Officer summarizing the results of your analysis and your recommendation for the best plan for the company. Include specific financial information from your analysis. Also include any non-financial information that was part of your decision making process.

Answer 1

1	Computation of Contribution Statement for 2017
			Amount	Per unit cost*
	Sales		21600000	36
	Variable Cost:
	Direct labor	5400000		9
	Direct Material	3240000		5.4
	Variable manufacturing overhead	1944000		3.24
	Variable Selling Expenses	1080000		1.8
			11664000	19.44
	Contribution [Sales - Variable expense]		9936000	16.56
	Fixed Cost:
	Fixed Manufacturing overhead	4200000
	Fixed selling Expenses	1200000
	Fixed administrative Expenses	2400000
			7800000
	Profit [Contribution - Fixed Cost]		2136000
	Breakeven sales unit	= Total Fixed Cost/ Contribution per unit
		=7800000/16.56		471014.4928
	Breakeven Sales	= Breakeven sales unit*selling price per unit
		=36*471014.5		$ 16,956,521.74
2	Computation of Contribution Statement for 2017 considering the recommendation by Production Manager
			Amount	Per unit cost*
	Sales [(600000*1.08)*$34.5]		22356000	34.5
	Variable Cost:
	Direct labor [(600000*1.08)*$9]	5832000		9
	Direct Material [(600000*1.08)*($5.4*90%)]	3149280		4.86
	Variable manufacturing overhead [(600000*1.08)*$3.24]	2099520		3.24
	Variable Selling Expenses [(600000*1.08)*$1.8]	1166400		1.8
			12247200	18.9
	Contribution [Sales - Variable expense]		10108800	15.6
	Fixed Cost:
	Fixed Manufacturing overhead	4200000
	Fixed selling Expenses	1200000
	Fixed administrative Expenses	2400000
			7800000
	Profit [Contribution - Fixed Cost]		2308800
	Breakeven sales unit	= Total Fixed Cost/ Contribution per unit
		=7800000/15.6		500000
	Breakeven Sales	= Breakeven sales unit*selling price per unit
		=34.5*500000		$ 17,250,000.00
3	Computation of Contribution Statement for 2017 considering the recommendation by Quality Manager
			Amount	Per unit cost*
	Sales [(600000*1.01)*$36.5]		22119000	36.5
	Variable Cost:
	Direct labor [(22119000)*20%]	4423800		7.30
	Direct Material [(600000*1.01)*($5.4)]	3272400		5.4
	Variable manufacturing overhead [(600000*1.01)*$3.24]	1963440		3.24
	Variable Selling Expenses [(600000*1.01)*$1.8]	1090800		1.8
			10750440	17.74
	Contribution [Sales - Variable expense]		11368560	18.76
	Fixed Cost:
	Fixed Manufacturing overhead	4200000
	Equipment Cost	600000
	Fixed selling Expenses	1200000
	Fixed additional selling Expenses	120000
	Fixed administrative Expenses	2400000
			8520000
	Profit [Contribution - Fixed Cost]		2848560
	Breakeven sales unit	= Total Fixed Cost/ Contribution per unit
		=8520000/18.76		454157.7825
	Breakeven Sales	= Breakeven sales unit*selling price per unit
		=36.5*454157.7825		$ 16,576,759.06
4	Computation of Contribution Statement for 2017 considering the recommendation by Sales Manager
			Amount	Per unit cost*
	Sales [(600000*1.1)*$31]		20460000	31
	Variable Cost:
	Direct labor [(20460000)*15%]	3069000		4.65
	Direct Material [(600000*1.1)*($5.4)]	3564000		5.4
	Variable manufacturing overhead [(600000*1.1)*$3.24]	2138400		3.24
			8771400	13.29
	Contribution [Sales - Variable expense]		11688600	17.71
	Fixed Cost:
	Fixed Manufacturing overhead	4200000
	Equipment Cost	500000
	Fixed selling Expenses	1200000
	Fixed additional selling Expenses	75000
	Decrease in fixed cost	-450000
	Fixed administrative Expenses	2400000
			7925000
	Profit [Contribution - Fixed Cost]		3763600
	Breakeven sales unit	= Total Fixed Cost/ Contribution per unit
		=8520000/17.71		447487.2953
	Breakeven Sales	= Breakeven sales unit*selling price per unit
		=31*447487.2953		$ 13,872,106.15
Recommendation : Sales manager's recommendation shall be considered as the same gives the highest profit