Question

RayLok Incorporated has invented a secret process to improve light Intensity and, as a result, manufactures a variety of products related to this process. Each product is independent of the others and is treated as a separate profit/loss clivision. Product (division) managers have a great deal of freedom to manage their divisions as they think best. Failure to produce target divisional income is dealt with severely; however, rewards for exceeding one's profit objective are, as one division manager described them, lavish. The DimLok Division sells an add-on automotive accessory that automatically dims a vehicle's headlights by sensing a certain intensity of light coming from a specific direction. DimLok has had a new manager in each of the 3 previous years because each manager failed to reach RayLok's target profit level. Donna Barnes has just been promoted to manager and is studying ways to meet the current target profit for DimLok. DimLok's two profit targets for the coming year are $990,000 (25% return on the investment in the annual fixed costs of the division) and S25 (pre-tax) profit for each DimLok unit sold. Other constraints on the division's operations are as follows: . Production cannot exceed sales because RayLok's corporate advertising program stresses completely new product models each year, although the models might have only cosmetic changes. • DimLok's selling price cannot vary above the current selling price of $300 per unit but may vary as much as 10% below $300. . A division manager can elect to expand fixed production or selling facilities; however, the target profit objective related to fixed costs is increased by 25% of the cost of any such expansion. Furthermore, a manager cannot expand fixed facilities by more than 35% of existing fixed cost levels without approval from the board of directors.

Answer 1

Answer with working is given below

Current Fixed cost 1. Profit target at 25% on Fixed Cost $990,000 $3,960,000 Fixed costs is (Profit /25%) Revised Fixed cost Existing Fixed Cost Increase in Fixed cost Revised Fixed cost Profit at 25% on above Total Target needed $3,960,000 $1,190,000 $5,150,000 $1,287,500 $6,437,500 Considering all constraints In excess of 79,000 units First 59,000 Units $300 $200 $100 59,001- 79,000 units $275 $200 Selling price Variable cost Contribution per unit $275 $175 $75 $250 $25 $75 Profit per bike Revised Contribution per bike Units Total Contribution 59,000 $4,425,000 $50 20,000 $1,000,000 Balance Contribution (A-B-C) Units to achieve above contribution $1,012,500 A-B-C 13,500 ($1,012,500/$75) First Slab Second Slab Third Slab Total Units to achieve profit objective Units 59,000 20,000 13,500 92,500 3.a) Budgeted Income Statement $17,700,000 $9,212,500 $26,912,500 Revenue (59,000 *300) (33,500*275) Total Revenue Less: Variable cost (79,000 *200) (13,500*175) Total Variable cost Contribution Margin Fixed Cost Operating Income $15,800,000 $2,362,500 $18,162,500 $8,750,000 $5,150,000 $3,600,000 Profit Objective 25% on Fixed cost Profit of $25 per bike sold on 92,500 units Total Profit $1,287,500 $2,312,500 $3,600,000 3.b) Answer is Yes Based on above working profit objective has been achieved