I'd be grateful if someone could show how to approach this management accounting problem. Thanks in advance.
Homework Answers
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| Crescent Corporation | ||
| Particulars | USD | USD |
| Sales | 15,000,000.00 | |
| Manufacturing Exp. | ||
| Variable | 8,400,000.00 | |
| Fixed | 1,400,000.00 | 9,800,000.00 |
| Gross Margin | 5,200,000.00 | |
| Selling & Administrative Exp. | ||
| Commission to agents | 2,850,000.00 | |
| Fixed advertising expenses | 400,000.00 | |
| Fixed administrative expenses | 1,600,000.00 | 4,850,000.00 |
| Net Operating Income | 350,000.00 |
| Contribution format income statement | |||
| Particulars | USD | ||
| Sales | 15,000,000.00 | A | |
| Less | Commission to agents | 2,850,000.00 | B |
| Net Sales (net of commission) | 12,150,000.00 | C | |
| Less | Variable Manufacturing Exp. | 8,400,000.00 | D |
| Contribution | 3,750,000.00 | E | |
| Less | Fixed costs | ||
| Fixed Manufacturing Exp. | 1,400,000.00 | F | |
| Fixed advertising expenses | 400,000.00 | G | |
| Fixed administrative expenses | 1,600,000.00 | H | |
| Net Operating Income | 350,000.00 | I | |
| Variable cost to % of sales | 56.00% | J= D/A | |
| Contribution to % of sales | 25.00% | K=E/A | |
| Particulars | USD |
| Fixed Manufacturing Exp. | 1,400,000.00 |
| Fixed advertising expenses | 400,000.00 |
| Fixed administrative expenses | 1,600,000.00 |
| Total Fixed cost | 3,400,000.00 |
| We know at Break even point Contribution is equal to fixed cost and profit is zero. | |
| So contribution needed for breakeven business is $ 3,400,000. | |
| Contribution to % of net sales | 25.00% |
| So net sales will be contribution/Contribution to % of net sales: | |
| Break-even Sales | 13,600,000.00 |
| Proof | |
| Break-even Sales | 13,600,000.00 |
| Commission at 19% | 2,584,000.00 |
| Variable Manufacturing Exp. | 7,616,000.00 |
| Contribution | 3,400,000.00 |
| Total Fixed cost | 3,400,000.00 |
| Net Operating Income | - |
| Ans to 1 a | 13,600,000.00 |
| Particulars | USD |
| Fixed Manufacturing Exp. | 1,400,000.00 |
| Fixed advertising expenses | 400,000.00 |
| Fixed administrative expenses | 1,600,000.00 |
| Total Fixed cost | 3,400,000.00 |
| We know at Break even point Contribution is equal to fixed cost and profit is zero. | |
| So contribution needed for breakeven business is $ 3,400,000. | |
| Now here commission increased by 3% so contribution | |
| will decrease by 3% as commission has direct impact on contribution. | |
| Contribution to % of net sales | 22.00% |
| Break-even Sales | 15,454,545.45 |
| Proof | |
| Break-even Sales | 15,454,545.45 |
| Commission at 22% | 3,400,000.00 |
| Variable Manufacturing Exp. | 8,654,545.45 |
| Contribution | 3,400,000.00 |
| Total Fixed cost | 3,400,000.00 |
| Net Operating Income | - |
| Ans to 1 b | 15,454,545.45 |
| Ans to 1 c |
| Cost of own sales force | USD |
| Annual payroll cost | 350,000.00 |
| Travel and entertainment | 200,000.00 |
| Sales manager and support staff | 100,000.00 |
| Cost of own sales force | 650,000.00 |
| Particulars | USD |
| Fixed Manufacturing Exp. | 1,400,000.00 |
| Fixed advertising expenses | 650,000.00 |
| Fixed administrative expenses | 1,600,000.00 |
| Cost of own sales force | 650,000.00 |
| Total Fixed cost | 4,300,000.00 |
| We know at Break even point Contribution is equal to fixed cost and profit is zero. | |
| Now here commission is 12% so contribution | |
| will increase by 7% as commission has direct impact on contribution. | |
| So contribution needed for breakeven business is $ 4,300,000. | |
| Contribution to % of net sales | 32.00% |
| So net sales will be contribution/Contribution to % of net sales: | |
| Break-even Sales | 13,437,500.00 |
| Proof | |
| Break-even Sales | 13,437,500.00 |
| Commission | 1,612,500.00 |
| Variable Manufacturing Exp. | 7,525,000.00 |
| Contribution | 4,300,000.00 |
| Total Fixed cost | 4,300,000.00 |
| Net Operating Income | - |
| Ans to 1 c | 13,437,500.00 |
| Answer 3 | ||
| If sales reduced by 10% | ||
| Particulars | USD | |
| Sales | 13,500,000.00 | This is A*90% |
| Commission to agents | 2,565,000.00 | This is sales*19% |
| Net Sales (net of commission) | 10,935,000.00 | |
| Variable Manufacturing Exp. | 7,560,000.00 | This is D*90% |
| Contribution | 3,375,000.00 | |
| Fixed costs | ||
| Fixed Manufacturing Exp. | 1,400,000.00 | |
| Fixed advertising expenses | 400,000.00 | |
| Fixed administrative expenses | 1,600,000.00 | |
| Net Operating Income | (25,000.00) | |
| As net Operating Income is negative so margin of safety is zero. | ||
| Answer 4 | USD |
| Operating income when commission was 19% | 350,000.00 |
| Total Fixed cost | 4,300,000.00 |
| Desired contribution | 4,650,000.00 |
| Now here commission is 12% so contribution | |
| will increase by 7% as commission has direct impact on contribution. | |
| Contribution to % of net sales | 32.00% |
| So net sales will be contribution/Contribution to % of net sales: | |
| Desired Sales | 14,531,250.00 |
| Proof | |
| Desired Sales | 14,531,250.00 |
| Commission | 1,743,750.00 |
| Variable Manufacturing Exp. | 8,137,500.00 |
| Contribution | 4,650,000.00 |
| Total Fixed cost | 4,300,000.00 |
| Net Operating Income | 350,000.00 |
| Ans to 4 | 14,531,250.00 |
| Ans to 5 | |||
| Let Sales value be 100X | |||
| Income Statement | 22% Commission | Own Sales Force | |
| Sales | 100X | 100X | |
| Commission | 22X | 12X | |
| Net Sales | 78X | 88X | |
| Variable cost | 56X | 56X | 56.00% |
| Contribution | 22X | 32X | |
| Fixed Cost | 3,400,000.00 | 4,300,000.00 | As per calculation done in Q-1 |
| In our case | (22X-3,400,000) is equal to (32X-4,300,000) | ||
| By solving for X, we will get USD | 90,000.00 | ||
| Breakeven Sales is 100X | 9,000,000.00 | ||
| Proof | 22% Commission | Own Sales Force | |
| Sales value | 9,000,000.00 | 9,000,000.00 | |
| Commission | 1,980,000.00 | 1,080,000.00 | |
| Variable Manufacturing Exp. | 5,040,000.00 | 5,040,000.00 | |
| Contribution | 1,980,000.00 | 2,880,000.00 | |
| Total Fixed cost | 3,400,000.00 | 4,300,000.00 | |
| Net Operating Income | (1,420,000.00) | (1,420,000.00) | |
| Net Income is same. | |||
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