Question

HELP PLEASE

Accountant, I have good news... I need help analyzing one of our current products, the Air-Accountant shoes. Here is the information about the product: Selling Price $44 (accountants are cheap) DM - $14 DL - $9 Var Oh - $5 Fixed costs per year - $80,000 Currently, we are selling 6,250 pairs of Air-Accountants per year. We need to determine the following: 1. Break-even units and sales dollars 2. Margin of safety in units, sales dollars, and percentage 3. Operating Leverage 4. What happens if we switch material suppliers? We would pay an extra $1.50 per shoe in materials but the higher quality could lead to a 10% increase in sales (units). Should we do this? 5. Going back to the original data, what if we spent $5,000 on advertising this year and it increased sales (units)by 4%... should we go forward with this plan? 6. By what percentage would sales have to increase for the $5,000 of advertising to make sense? Mr. Sole, our boss, will want to see this in an excel spreadsheet and may have questions of his own. As a result, we need to build the excel sheet in such a way that in can be updated at a moment's notice. The excel sheet should be formatted in a professional manner as well. Please submit this to Mr. Kelly for him to review by the due date. Good luck C.P. Accountant

Answer 1

1.

breakeven unit=total fixed cost/contribution per unit

fixed cost=80000

contribution per unit=selling price-DM-DL-var OH

contribution per unit=44-14-9-5=16

breakeven unit=80000/16=5000 units

breakeven sales=5000*44=220000

2.

margin of safety in units=budgeted sales unit - breakeven sales units

margin of safety in units=6250-5000=1250 units

margin of safety in sales= budgeted sales-breakeven sales

margin of safety in sales=(6250*44)-220000=275000-220000=55000

margin of safety in percentage=((budgeted sales-breakeven sales)/budgeted sales)*100

margin of safety in percentage=((275000-220000)/275000)*100=20%

3. operating leverage

	$
sales (44*6250)	275000
DM (14*6250)	87500
DL (9*6250)	56250
var OH (5*6250)	31250
contribution	100000
fixed cost	80000
operating leverage	20000

contribution=275000-87500-56250-31250=100000

opearing leverage=100000-80000=20000

4. according to the changes the new DM=14+1.50=15.50 and new sales will be 6250*110%=6875

the new operating leverage will be

	$
sales (44*6875)	302500
DM (15.50*6875)	106562.5
DL (9*6875)	61875
var OH (5*6875)	34375
contribution	99687.5
fixed cost	80000
operating leverage	19687.5

the new operating leverage is 19687.5,comparing to the old operating leverage the new amount is less and the company should avoid this changes

5. according to this changes the new fixed cost=80000+5000=85000 and new sales =6250*104%=6500

the new operating leverage is

	$
sales (44*6500)	286000
DM (14*6500)	91000
DL (9*6500)	58500
var OH (5*6500)	32500
contribution	104000
fixed cost	85000
operating leverage	19000

on comparing this operating leverage with original data the profit amount is less this suggestion should also be rejected.

6. if the contrubution amount is increased by 1000 then the operating leverage becomes 20000 and it will be same for the original data that is assume contribution is 105000 (104000+1000) divide it with contribution per unit

105000/16=6562.5 units,

if the company produces 6562.5 then its operating leverage will be same for original data

6562.5/6250=1.05

that is a minimum 5% increase in sales of $6250 units needs to make a sense for adding a 5000 of advertisement cost.increase in 5% leads to profit more than 20000