Question 1 – CVP Analysis
Brandon Manufacturing provides the data below relating to its single product for 2020:
Selling price per unit $20
Annual fixed manufacturing costs $250,000
Annual fixed non-manufacturing costs $30,800
Variable manufacturing costs per unit $12
Variable selling costs per unit $2
Annual sales volume expected in 2020: 52,000 units
Complete the following table calculating each requirement listed in the table.
1.Contribution margin per unit
2.Contribution margin ratio
3.Breakeven point in units
4.Breakeven point in sales dollars
5.Firm’s profit if 46,800 units are sold
6.Firm’s profit if 52,000 units are sold
7.Break even point if variable manufacturing costs decreases by $2 per unit
8.Break even point if variable manufacturing costs increases by $2 (from original cost and fixed manufacturing costs decreases by $100,000
9.What is the total contribution margin expected in 2020?
10.What would be the expected profit in 2020 if fixed costs increased by $20,000.
Question 2 – Accept or reject an special order (Use data from Question 1)
The production capacity of Brandon Manufacturing is 65,000 units. Brandon Manufacturing receives an offer from TMart Ltd (a foreign wholesaler) to purchase an additional 10,000 units at $15 per unit. If the offer from TMart Ltd is accepted, Brandon manufacturing would incur additional fixed costs of $35,000 but it would not incur any additional variable selling costs. Based on data estimated by Brandon Manufacturing for 2020, should Brandon accept the offer? Justify your decision answering the following questions:
1.What is the available production capacity to decide whether to accept or not the offer?
2.What would be the incremental revenue if the offer is accepted?
3.What would be the incremental cost if the offer is accepted?
4.Would you accept the offer or not? Why?
Question 3 – Make or buy decision
Best Aircon Ltd produces one model of air conditioner that uses different components. One of the components is the compressor. Each airconditioner uses one compressor. The company currently produces 8,000 compressors per year. Total variable costs per compressor is $240. The annual fixed costs for the production line of the compressors is $800,000. 40 per cent of these costs can be avoided if the production line is closed. The remaining 60% of the fixed costs are unavoidable.
QC Ltd contacted Best Aircon and offer to sell the 8,000 compressors per year at a cost of $260 per compressor.
1.What is the cost to make the air compressors? Show your calculations here …………………………………………………………………………..
2.What is the cost to buy the air compressors? Show your calculations here ……………………………………………………………………………………………….
3.Would you accept the offer?
4.Why? (explain in one sentence)
5.What qualitative factor would change your decision? (answer in one sentence)
Should Best Aircon Ltd accept the offer from QC Ltd? Justify your decision answering the following questions:
Office Supplies Ltd has a geographical structure with two divisions aligned with its two markets: Sydney and Brisbane.
The following data is provided for the two divisions for the year 2019:
Sales $600,000 $400,000
Contribution margin ratio 52% 58%
Fixed costs $280,000 $190,000
Divisional investments $200,000 $280,000
Common costs for the year totalled $70,000 and were allocated based on sales.
The management of Office Supplies Ltd faced an investment opportunity, which would require an investment of $50,000 in 2020 and would deliver sales of $100,000 with variable costs estimated at $50,000 and fixed costs at $42,250.
1.Prepare a divisional performance (divisional margin and divisional profit) for 2019 based on the information provided
2.If divisional performance is evaluated based on ROI, which division would want to take over the new investment opportunity? (calculate the divisional ROI of the two divisions before the investment and calculate the ROI of the new investment)
ROI new investment:
3.If divisional performance is based on residual income based on charge for capital of 15%, which division would want to take over the new investment opportunity? Demonstrate this comparing the residual income for each division before and after the investment is made by each division.
RI before investment is made
RI after investment is made