Question

 OFFICE OUTLET LTD.

 Office Oulet LTD. produces and sells printing products across Canada. Last year, sales volume totaled $850,000. Volume for the first five months of the current year totaled $600,000, and sales were expected to be $1.6 million for the entire year. Unfortunately, the printing business in the region where Office Depot is located is extremely competitive. More than 100 printing shops are all competing for the same business.

 The company currently manufactures one type of high-quality printer with the average unit selling prices, unit variable costs, and direct fixed costs are as follows:

 Required:

 1) Calculate the following:

 a. Number of printers that are expected to be sold during the current year

 b. number of printers that must be sold for Office Outlet to break even

 C. sales dollars in order to break even

 d. generate a graph which plots the break even analysis

 2) Office Outlet can buy machines that will make the majority of the printer parts. If the

 company chooses to purchase the machines, the variable costs will decrease by 8% but

 the fixed costs will increase by $52,000. The plan would be to purchase the machine at

 the beginning of July. Fixed costs for the company are incurred equally throughout the

 year. Calculate the following:

 a. impact on operating income

 b. new number of printers to break even

 c. sales dollars to break even

 3. Office Outlet is considering the option of opening a new retail outlet which will increase

 salaries by $40,000; insurance by $10,000 and rent expense by $30,000 per year. This is

 expected to increase sales by 25 percent and the plan would be to open this up at the

 beginning of July (half way through the upcoming year). Calculate the following:

 a. Impact on Office Outlet's expected profits for the year

 b. new break even point in quantity of printers

 c. new break even point in sales dollars

 4. Write a memo to the CFO of Office Outlet discussing your recommendations from both

 question 2 & 3 above. Discuss both quantitative and qualitative factors in your

 recommendation.

 New Paper Product

 Amy Lewis is the Director of Marketing for Office Outlet, and is producing a sales forecast for a

 new line of paper products. The divisional manager has been gathering data so that he can choose between two different production processes. The first process would have a variable cost of $10 per case produced and total fixed cost of $100,000. The second process would have a variable cost of $6 per case and total fixed cost of $200,000. The selling price would be $30

 per case. Amy had just completed a marketing analysis that projects annual sales of 30,000 cases, however she is reluctant to report the 30,000 forecast to the divisional manager. She knows that the first process would be labor intensive, whereas the second would be largely

 automated with little labor and no requirement for an additional production supervisor. If the first process is chosen, Sam Adams, a good friend, will be appointed as the line supervisor. If the second process is chosen, Sam and an entire line of laborers will be laid off. After some

 consideration, Amy revises the projected sales downward to 22,000 cases. She believes that the revision downward is justified. Since it will lead the divisional manager to choose the manual system, it shows a sensitivity to the needs of current employees-a sensitivity that she is afraid her divisional manager does not possess. He is too focused on quantitative factors in his

 decision making and usually ignores the qualitative aspects.

 5. Based on the above information, calculate the following:

 a. Break even point in units for each process

 b. The sales volume at which the two processes have the same profitability as

 eachother

 c. The range of sales that the automated process is more profitable than the

 manual process

 d. The range of sales that the manual process is more profitable than the

 automated process

 6. Write a memo to the Divisional Manager discussing Amy's decision to alter the sales

 forecast. Discuss whether Amy acted ethically and if her decision was justified. Provide a

 recommendation on which alternative the Manager should select and discuss both the

 quantitative and qualitative factors related to the decision.

Answer 1

1) a) Number of printers that are expected to be sold during the current year,

Answer:

No. of Printers = Expected Annual Sales / Selling Price per unit

= 1,600,000 / 5,000

= 320 Printers

1) b) Number of printers must be sold for office outlet to Break Even

Answer:

Fixed Cost = Depreciation + Insurance + Salaries + Rent

FC = 150,000 + 50,000 + 10,000 + 15,000

  Fixed Cost = 225,000 dollars

  Contribution/unit = Selling price per unit - (Labour + Manufacturing + Variable cost per unit)

= 5000 - (1386 + 1433 + 1195)

Contribution/unit = 986 dollar per unit

  BREAK EVEN(UNIT) = FIXED COST / CONTRIBUTION PER UNIT

= 225,000 dollars / 986 dollar per unit

BREAK EVEN UNIT = 228 Units (Approximate)

1) C)  BREAK EVEN SALES (DOLLAR) = Break Even Units x Selling Price per unit

= 228 units x 5000 dollar

= 1,140,000 dollar

1) D) Graph

2) Assumptions - Accounting period is from January to December and Sales are made even throughout the year

2) A)  OPERATING INCOME

PARTICULARS	JAN TO JUNE 160 UNITS	JULY TO DEC 160 UNITS
Sales (5000 dollar per unit)	800,000	800,000
Less: Variable Cost per unit - 4014	(642,240)	-
3692.88	-	(590,860.80)
CONTRIBUTION	157,760	209,139.20
Less: Fixed Cost	(225,000)	(277,000)
OPERATING INCOME	(67,240)	(67,860.80)

2) B) Break Even Units

PARTICULARS	AMOUNT
Operating Profit	0
Add: Fixed cost	502,000
Contribution	502,000
Add: Variable Cost	1,233,100
Break Even Sales	1,735,100

Break Even Units = Break Even Sales / Selling Price per unit

= 1,735,100 / 5,000 = 347 units

2) C) Break even Sales = 1,735,100 dollars

3) A)

PARTICULARS	JAN TO JUNE 160 UNITS	JULY TO DEC 200 UNITS
Sales (5000 dollar per unit)	800,000	1,000,000
Less: Variable Cost per unit - 4014	(642,240)	(802,800)
CONTRIBUTION	157,760	197,200
Less: Fixed Cost	(225,000)	(305,000)
OPERATING INCOME	(67,240)	(107,800)

3) B)

PARTICULARS	AMOUNT
Operating Profit	0
Add: Fixed cost	530,000
Contribution	530,000
Add: Variable Cost	1,445,040
Break Even Sales	1,975,040

BREAK EVEN UNITS = SALES / SELLING PRICE PER UNIT

= 1975040/5000 = 395 UNITS

3) C) BREAK EVEN SALES = 1975040

4) In order to increase profitability of the business, make investment in New machinery on the basis of Investment decisions like Net Present Value, incorporate cost effective techniques, attract customers with competitive strategy of the business since the market has more competitors.

5) A) BREAK EVEN

FIRST PROCESS

Break Even units = Fixed Cost / Selling price - variable cost per unit

Break Even units = 100,000 / 20 = 5000 units

SECOND PROCESS

Break even units = Fixed Cost / Selling Price - Variable cost per unit

Break even Units = 200,000 / 24 = 8333 units

5) B) Sales units at which both process yields same profit

Units1(sp per unit1 - vc per unit1) - Fixed Cost1 = Units2(sp per unit2 - vc per unit2) - Fixed Cost2

Units(30-10) - 100,000 = Units(30-6) - 200,000

20Units - 100,000 = 24Units - 200,000

4Units = 100,000

Units = 25000 units at which both process has same profit

6) The Manager should select the process where both manual and automated process are used to produce the product. Process with Full Manual Process incurs more cost on the product and hence fall burden on the customers while purchasing the product.