Question

Question based on modified problems 3.3 from the reference text [Flynn (2009)] from page 78 of the textbook:

Polymerco, a North American manufacturer of specialty polymers, has the following highly condense income statement, given in the table below. There current sales are to North American customers only. The president casually mentions that it would be nice to have more offshore sales to diversity the company.

Polymerco Income Statement
	This year ($000)	Last year ($000)
Gross sales	26518	24818
Bad debt	nil	nil
Net sales	26518	24818
COGS	22,243	21,341
Contribution margin	4275	3477
CM(%)	16.1%	14%
SG&A	2,122	2,067
Operating income	2153	1410
Other income and interest on long-term debt	-60	-50
Net income	2093	1360

(a)  if Polymerco's production is running at 84% capacity, what is the MAXIMUM DISCOUNT in percentage that you can provide?

(b)  if Polymerco's production is running at 100% capacity, how much percentage of DISCOUNT can you provide without reducing the profitability?

Answer 1

(a)If Polymerco's production is running at 84% capacity :

Here, current sales = $ 26518000

Possible sales at full capacity (100%) = current sales .............(1)

84%

where current sales is $ 26518000

now substitute the values in equation (1)

Possible sales at full capacity (100 %) = $26518000

84%

=$ 31569048

Possible increase in sales, without plant expansion,

=(31569048 - current sales)

=( 31569048 - 26518000)

=$ 5051048

There will not be any increase in fixed costs.

Hence,

The operating income will increase by app= 16.1% * 5051048

= $ 813219

(b)If polymerco's production is working at 100 % capacity

The company will need to invest in plant. This will increase fixed cost. So the company need to evaluate the proposal of capital expenditure and also external financing need and source of funds need to be determined.