COMM-305-Tutorials-Matthew-CASA-Review-Summer-2023 (1)

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COMM 305 Tutorials - Matthew COMM 305 Tutorials – Matthew CASA Final Review – Summer 2023 COMM 305 Tutorials – Matthew: CASA Final Review (Summer 2023) Question 1 – Part 1: The company that you work for as a managerial accountant (Twitter) uses independent agents to sell its products. These agents are currently being paid a commission of 15% of the sales price but are asking for an increase to 25% of sales made during the coming year. You had already prepared the following income statement for the company based on the 15% commission: Income Statement For Year Ending December 31, 2022 Sales $ 2,000,000.00 Cost of goods sold (60% variable costs 40% fixed costs) $ 1,500,000.00 Gross profit $ 500,000.00 Selling and administrative expenses Commissions only $ 300,000.00 Fixed costs $ 75,000.00 $ 375,000.00 Income before taxes $ 125,000.00 Income tax expense (20%) $ 25,000.00 Operating income $ 100,000 Management wants to examine the possibility of employing the company's own salespeople. The company would need a sales manager at an annual salary of $75,000 and three sales people at an annual salary of $25,000 each, plus a commission of 5% of sales. All other fixed costs, as well as the variable cost percentages would remain the same as in the above pro forma income statement. The new CEO Elon Musk informs you that if you don’t perform the calculations correctly that you, the sales agents, and your mother will be fired, even if she doesn’t work at Twitter. Required: A. Based on the provided information calculate the break-even point in sales dollars for the company for the year ending December 31, 2022. B. Calculate the break-even point in sales dollars for the year ending December 31, 2022, if the company uses its own salespeople. C. Calculate the volume of sales dollars required for the year ending December 31, 2022, to have the same operating income as projected in the pro forma income statement if the company continues to use the independent sales agents and agrees to their demand for a 25% sales commission. © 2023 COMM 305 Tutorials - Matthew

COMM 305 Tutorials - Matthew COMM 305 Tutorials – Matthew CASA Final Review – Summer 2023 D. Calculate the estimated sales volume in sales dollars that would generate an identical operating income for the year ending December 31, 2022, regardless of whether the company employs its own salespeople or continues to use the independent sales agents and pays them a 25% commission. Question 1 – Part 2: Bob Company is contemplating a major change in its cost structure. Currently, all its drafting work is performed by skilled draftspersons. The owner, Bob, is considering replacing the draftspersons with a computerized drafting system. However, before making the change, Bob would like to know its consequences, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative: Manual System Computerized System Sales $ 5,000,000.00 $ 5,000,000.00 Variable costs $ 2,600,000.00 $ 1,800,000.00 Contribution margin $ 2,400,000.00 $ 3,200,000.00 Fixed costs $ 1,200,000.00 $ 2,000,000.00 Operating income $ 1,200,000.00 $ 1,200,000.00 Required: A. Determine the degree of operating leverage for each alternative. B. Which alternative would produce the higher operating income if sales increased by $500,000, calculate by how much operating income will increase and what is the operating income. C. Using the margin of safety ratio determines which alternative could sustain the greater decline in sales before operating at a loss. © 2023 COMM 305 Tutorials - Matthew

COMM 305 Tutorials - Matthew COMM 305 Tutorials – Matthew CASA Final Review – Summer 2023 Question 2 – Part 1: Bob manufactures three products, A, B & C. Bob prefers to not formally name his products as to create hype. The income statement for the three products and the whole company is shown below: Product A Product B Product C Total Sales $50,000 $60,000 $65,000 $175,000 Variable Costs 25,000 40,000 60,000 125,000 Fixed Costs 16,000 12,000 8,000 36,000 Total Costs 41,000 52,000 68,000 161,000 Operating Income $9,000 $8,000 -$3,000 $14,000 Bob lives a very carefree lifestyle out of his parent’s basement, with no strategic direction in his business he mindlessly produces 1,000 units of each product. To operate his business, Bob acquired a decent machine off Facebook marketplace which has a capacity is 9,000 machine hours. The machine hours required for each product are four hours for Product A, three hours for Product B, and two hours for Product C. Fixed costs are allocated based on machine hours. Required: A. If the current production levels are maintained, should the company eliminate Product C? Explain your reasoning. B. If the company can sell unlimited quantities of any of the three products, which product should be produced? C. Suppose the company can sell unlimited quantities of any of the three products. If a customer wanted to purchase 500 units of Product C, what would the minimum sale price per unit be for this order? D. The company has a contract that requires it to supply 500 units of each product to a customer. The total market demand for a single product is limited to 1,500 units. How many units of each product should the company manufacture to maximize its total contribution margin including the contract and the total profits. © 2023 COMM 305 Tutorials - Matthew

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