Question

HRM732

Individual Assignment #2 (30 Marks) 15% of the overall grade for the course

The year has passed and Ron has become used to being able to come to you with more and more complex finance and accounting questions about this Ukrainian Division. He has come into your office in the middle of November of the following year. Your projects are going quite well as he has a new task for you. He’s been reviewing the operations of the Ukrainian plant and has some questions about the Income Statement. The plant appears to be much more profitable than the other bottling plants within the company and he’s wondering about implementing some of the practices that he has seen there into Canadian Bottling sites. He has provided you with the Income Statement that the Canadian finance team has provided him and wants some key pieces of information from you.

Ukrainian Bottling Company Inc.
Income Statement
For the Year Ended October 31st, XXXX
Revenue		$650,000.00
Cost of Goods Sold
	Labour	$75,000.00
	Material	$50,000.00
Total Cost of Goods Sold		$125,000.00
Gross Profit		$525,000.00
Expenses
	Packaging Labour	$67,000.00
	Electricity	$14,000.00
	Amortization	$32,000.00
	Rent	$15,000.00
	Shipping	$160,000.00
Total Expenses		$288,000.00
Net Income		$237,000.00

An executive summary of their financial position has been provided by the Ukrainian Management team; all of this information appears to be useful to them but, only some is relevant to you. Highlights of the financial figures are as follows:

Current number of unit produced:	12,000
Number of Employees on Staff:	521
Original cost of Smelting Machinery:	$85,000
Number of Shares Outstanding:	125,000
Trading Price per Share:	$12

Required:

1. Identify all the expenses above as being either Fixed or Variable. For expenses labeled Shipping, Amortization and Electricity, explain why you chose either fixed or variable. (7 Marks)
2. Using your cost behaviour breakdown, calculate the Contribution Margin for each unit produced. (7 Marks)
3. What would be the number of units necessary to produce for a breakeven scenario? (5Marks)
4. Management has recently discovered that they are now able to lower their labour costs from 67,000 to 55,000 within the year with all other costs remaining the same. What is the Contribution Margin now? (7 Marks)
5. Calculate the Gross Profit Margin and Net Profit Margin Ratios. (4 Marks

Answer 1

1	Identify all the expenses above as being either Fixed or Variable.
	Types of Expenses	Nature -Fixed /Variable
a	Labor ,Material and Packaging Labor	All these costs are variables as these will change due to change of production or sales
b	Rent Expenses	It is fixed Cost as it will not change due to reduction /sales level going up or down even in the short run also.
c	Shipping Expenses	It is a variable expense as will change due to change to increase or decrease in sales level.
d	Amortization	It is a fixed expense as it will not change due to business activity change and it is shown as a deduction from intangible assets
e	Electricity	It is a variable expense as it will vary with changes in production levels ,consumption of electricity of machinery during production runs
ii	Contribution Margin per unit	Sales -V.C per unit
	V.C
	Material	50000
	Labor	75000
	Packaging Labor	67000
	Shipping	160000
	Electricity	14000
	Total V.C	366000
	Units	12000
	Per Unit V.C	30.50
	Sales Price per unit	650000/12000
		54.17
	Contribution Margin per unit	54.17-30.50
		23.67 per unit
iii	What would be the number of units necessary to produce for a breakeven scenario?
	F.C
	Amortization	32000
	Rent Expenses	15000
		47000
	Contribution Margin per unit	23.67 per unit
	Break Even in Units	F.C/Contribution Margin per unit
		47000/23.67
		1985.64 units
iv	Management has recently discovered that they are now able to lower their labor costs from 67,000 to 55,000 within the year with all other costs remaining the same. What is the Contribution Margin now?
	New V.C
	Total V.C	366000
	Reduction in labor cost	12000
		354000
	New V.C per unit	354000/12000
		$29.50
	Sales Price per unit	$54.17
	New Contribution Per Unit	54.17-29.5
		$24.67
v	Calculate the Gross Profit Margin and Net Profit Margin Ratios.
	Gross Profit Margin	Revenue-Cost of Goods Sold/Revenue*100
		650000-125000/650000*100
		525000/650000*100
		80.77%
	Net Profit Margin	Gross Profit-Operating and other exp/Revenue*100
		237000/650000*100
		36.46%

Answer 2

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