Question

Baby Center Ltd. Baby Center Ltd. makes portable high chairs. The high chair is generally marketed through exclusive retailers located in upscale shopping malls. In late 2019, Diana Suarez, the president of the company, was considering an alternative marketing plan for 2020 that was presented to her by Bill Duffy, the marketing manager. Based on sales from January through October 2019, Diana expected that 2020 sales would amount to 30,000 units. Bill's alternative marketing plan is presented below: 2020 Marketing Plan: "At the present time, we sell the product to retailers for $72.00 per high chair. Retailers generally charge the consumers between $84.99 and $89.99. If we cut our selling price to retailers to $70.00, I expect that the product will do much better. Their increased markup will give them the incentive to display our product more prominently and to promote it more vigorously to customers. We should support this strategy by supplying more promotional materials to retailers, which I expect would be an increase of $6,000 in Advertising and Promotion costs. Based on the price cut and the increase in Advertising and Promotion, I expect that we will be able to boost our sales volume by 20 percent to 36,000 units in 2020." Diana received cost data from the company's CFO, Don Capp. Don expects that the cost data below are also reliable estimates for 2020 for a production volume up to 40,000 units. Beyond 40,000 units, the company would have to rent additional machines (with a capacity of 10,000 units each), which would increase fixed manufacturing overhead costs by $15,000 per machine. 2019 Cost Data Manufacturing Costs for high chairs (based on production volume of 30,000 units): Direct Materials Direct Labor Packaging Variable Manufacturing Overhead Fixed Manufacturing Overhead $20 per unit $14 per hour (each worker can make 2 units in 1 hour) $3.50 per unit $5.00 per unit $125,000 Selling and Administrative Costs for high chairs (based on sales volume of 30,000 units): Sales Commissions $8.25 per unit Shipping Costs $3.00 per unit Advertising and Promotion (fixed) $15,000 Fixed Selling and Admin Expenses $5,000

Answer 1

Part 1

1. CVP Income Statement for 2019

Particulars	Total $	Per unit $
Sales (30000 units)	2160000	72
Less:
Manufacturing Cost
Direct Materials	600000	20
Direct Labour	420000	14
Packaging	105000	3.5
Variable Manufacturing Overhead	150000	5
Fixed Manufacturing Overhead	125000
Selling and Administrative Cost
Sales commission	247500	8.25
Shipping costs	90000	3
Advertising and Promotion (fixed)	15000
Fixed Selling and admin Expenses	5000
Net profit	402500

2. The company’s contribution margin ratio for 2019 is

Contribution margin ratio = (Sales - Variable expenses)/ Sales
(2160000-1612500)/2160000                                                    25.3%
Details of Variable expenses Manufacturing Cost Direct Materials 600000 20 Direct Labour 420000 14 Packaging 105000 3.5 Variable Manufacturing Overhead 150000 5 Selling and Administrative Cost Sales commission 247500 8.25 Shipping costs 90000 3 Total variable expenses 1612500 Break Even Point in number of high chairs for the company Breakeven Point= Fixed expenses/ Sales price per unit                               = 145000/72                               =2014 units of high chairs Details of Fixed expenses Fixed Manufacturing Overhead 125000 Advertising and Promotion (fixed) 15000 Fixed Selling and admin Expenses 5000 Total Fixed expenses 145000

4. CVP Income statement for 2020

Particulars	Total $	Per unit $
Sales (36000 units)	2520000	70
Less:
Manufacturing Cost
Direct Materials	720000	20
Direct Labour	504000	14
Packaging	126000	3.5
Variable Manufacturing Overhead	180000	5
Fixed Manufacturing Overhead	125000
Selling and Administrative Cost
Sales commission	297000	8.25
Shipping costs	108000	3
Advertising and Promotion (fixed)	21000
Fixed Selling and admin Expenses	5000
Net profit	434000

5. a. The change in Net income from 2019 that Baby Centre would realise is $ 31500 if they adopt the marketing plan in 2020.

b. Yes, Baby Centre should adopt the plan in 2020.

6. The company’s Contribution margin ratio in 2020 is

Contribution margin ratio = (Sales - Variable expenses)/ Sales

(2520000-1935000)/2520000                                                    23.2%

Details of Variable expenses
Manufacturing Cost
Direct Materials	720000	20
Direct Labour	504000	14
Packaging	126000	3.5
Variable Manufacturing Overhead	180000	5
Selling and Administrative Cost
Sales commission	297000	8.25
Shipping costs	108000	3
Total variable expenses	1935000

7. Break Even Point in number of high chairs for the company

Breakeven Point= Fixed expenses/ Sales price per unit

                              = 151000/70

                              =2157 units of high chairs

Details of Fixed expenses
Fixed Manufacturing Overhead	125000
Advertising and Promotion (fixed)	21000
Fixed Selling and admin Expenses	5000
Total Fixed expenses	151000

Part 2

1. Incremental net income /Loss of the company if they accept Government contracts

Particulars	Amount	Per unit
Sales (12000 units)	624000	52
Less:
Manufacturing Cost
Direct Materials	240000	20
Direct Labour	168000	14
Packaging	42000	3.5
Variable Manufacturing Overhead	60000	5
Fixed Manufacturing Overhead	30000
Selling and Administrative Cost
Sales commission	99000	8.25
Shipping costs	36000	3
Net Loss	-51000

Particulars	Units	Amount $
Increase of fixed manufacturing overhead	40000-50000 units	15000
	50000-60000 units	15000

Total Overhead cost is $30000

2. No, Baby Center should not accept the proposal.