Question

4. Refer to the original data. Thaddeus Company's board of directors believes that the company's problemlos in inadequate promotion. By how much can advertising be increased and still allow the company to eam a target profit of 4.5% on sales of 60,000 units? 5. Write a memo to Thaddous Company's president, vice president, and sales manager explaining the analysis you have done, the pros and cons and risks of the various alternatives, and your suggestions for what they should consider before making a final decision Make a recommendation of what they should do. In your memo, assume that the president, vice president, and sales manager have little or no knowledge of managerial accounting concepts Show your work. Attach additional sheets as necessary. Part 1 is worth 10 points Part 2 is worth 10 points (5 points for each of the two parts) Parts 3 and 4 are worth 10 points each Part 5 is worth 10 points Points Possible: 10 + 10 + 10 + 10 + 10 = 50 points The case is to be done in teams. One case will be turned in for each team and each team member will receive the same grade. The most recent income statement for Thaddeus Company is on the last page All variable expenses in the company vary in terms of units sold, except for sales commissions, which are based on sales dollars. Variable manufacturing overhead is 30 cents per unit. There were no beginning or ending inventories. Thaddeus Company's plant has a capacity of 75,000 units per year. The company has been operating at a loss for several years. Management is studying several possible courses of action to determine what should be done to make next year profitable Required: 1. Redo Thaddeus Company's income statement in the contribution format Show both a Total column and a Per Unit column on your income statement. Leave enough space to the right of your numbers to enter the solution to both parts of (2) below. 2. The president is considering two proposals prepared by members of her staff a. For next year, the vice president would like to reduce the unit selling price by 20%. He is certain that this would fill the plant to capacity b. For next year, the sales manager would like to increase the unit selling price by 20%, increase the sales commission to 9% of sales, and increase advertising by $100,000. Based on marketing studies, he is confident this would increase unit sales by one-third. Sales (45,000 units at $10 per unit) $450,000 Prepare two contribution income statements, one showing what profits would be under the vice president's proposal and one showing what profits would be under the sales manager's proposal. On each income statement, include both Total and Per Unit columns (do not show per unit data for the fixed costs.) Less cost of good sold: Direct materials Direct labor Manufacturing overhead Gross margin $90,000 78,300 98,500 266,800 183,200 3. Refer to the original data. The president believes it would be a mistake to change the unit selling price. Instead, she wants to use less costly raw materials, thereby reducing unit costs by 70 cents. How many units would have to be sold next year to earn a target profit of $30,200? Less operating expenses: Selling expenses: Variable: Sales commissions Shipping $27,000 5.400 32,400 120,000 Fixed (advertising and salaries) Administrative: Variable (billing and other) Fixed (salaries and other) Net operating loss 1,800 48,000 202,200 ($19,000)

Answer 1

Contribution Format Income Statement
	1.		2.a.		2.b.
	Total	Per Unit	Total	Per Unit	Total	Per Unit
Sales	$ 450,000	$ 10	$ 600,000	$ 8	$ 720,000	$ 12
Variable Costs
Direct materials	90,000	2	150,000	2	120,000	2
Direct labor	78,300	1.74	130,500	1.74	104,400	1.74
Variable manufacturing overhead	13,500	0.30	22,500	0.30	18,000	0.30
Sales Commission	27,000	0.60	45,000	0.60	64,800	1.08
Shipping	5,400	0.12	9,000	0.12	7,200	0.12
Variable administrative	1,800	0.04	3,000	0.04	2,400	0.04
Total Variable Costs	216,000	4.80	360,000	4.80	316,800	5.28
Contribution margin	234,000	5.20	240,000	3.20	403,200	6.72
Fixed Costs
Fixed Manufacturing overhead	85,000		85,000		85,000
Fixed Selling Expenses	120,000		120,000		220,000
Fixed Administrative	48,000		48,000		48,000
Net Operating Income ( loss )	(19,000)		(13,000)		50,200

3. Revised variable cost per unit = $ ( 4.80 - 0.70) = $ 4.10

Contribution margin per unit = $ 10.00 - $ 4.10 = $ 5.90

Units to be sold to earn a target profit of $ 30,200 = ( Fixed Costs + Target Profit) / Contribution margin per unit = $ ( 253,000 + 30,200) / $ 5.90 = 48,000 units.