a clear picture of their cost structure. He calls his CFO, Mary Jane Montgomery in for a meeting. “Mary Jane, I am concerned that I am not current on our cost structure and how that is impacting our bottom line,” Paul begins. “Well, Paul, the company has grown con

Managerial Accounting: The Cornerstone of Business Decision-Making
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Chapter2: Basic Managerial Accounting Concepts
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Problem 26BEA
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Mirabel Manufacturing is a small but growing company that manufactures and sells marine sonar equipment. They employee a national sales force and their primary customers are marine retailers and boat dealerships. The company has expanded over the last 5 years and Paul Mirabel, the founder and CEO has become concerned that he no longer has a clear picture of their cost structure. He calls his CFO, Mary Jane Montgomery in for a meeting.

“Mary Jane, I am concerned that I am not current on our cost structure and how that is impacting our bottom line,” Paul begins.

“Well, Paul, the company has grown considerably over the past 5 years, so I’m not surprised that you feel a little disconnected with how things are going,” Mary Jane replied. She continued “In fact, I’ve been meaning to talk to you about a couple of big items such as increasing the sales commission to 15%. We’ve lost two of our best account managers in the last 9 months. It seems like we are behind the curve paying only 12% on gross sales.” 

“What do you mean we are behind the curve,” Paul replied angrily. “We have always been the leader in every aspect of our business.”

“Well, that may have been the case in the past, Paul, but frankly we need to step up our compensation package to stay competitive,” Mary Jane replied. She continued, “And that’s not everything. I met with Frank Jacobs from marketing and he said we need to have a bigger presence at the trade show in March. He told me he would need about $650,000 added to the marketing budget to support new marketing materials.” 

“Come on, Mary Jane, how can we do that when we are going to have to increase commission?” He continued, “I spoke with Dan Clark in production and he indicated that we have two pieces of equipment that need to be replaced by the end of the quarter and that’s going to set us back almost $1.2 million.”

Mary Jane shook her head. “Paul, I hate to bring this up but while we are talking costs, but Bob in purchasing stopped by the office and dropped off some revised cost information – it looks like several of our suppliers are talking about significant price increases by the end of the year.”

Paul slumped in his chair. “This is a mess, Mary Jane. Increasing commissions, new equipment, materials price increases and marketing expenses all at once. Even if Frank Mallow is correct that we should see a 10% increase in sales for the coming year, I just don’t see how we can make this work. We have to maintain enough profit to keep the shareholders happy and I can’t sleep when we dip below that $2 million margin of safety.” 

Mary Jane gathered up her papers. “Before you get too distressed, let me put together some figures and let’s see what this looks like on paper. I’ll get back to you by the end of the week. In the meantime, stay positive, we’ll find the best solution.”

The following income and cost data for Mirabel is provided:

  1. What is Mirabel’s over-all break-even point in sales dollars? Next assume that sales revenue remains constant, what is the impact on break-even and the margin of safety if Paul takes Mary Jane’s advice and increases sales commission to 15%?



Mirabel Manufacturing
Budgeted Income Statement
For the Year Ending December 31
$
Sales
36,750,000
Cost of goods sold:
Variable
$
13,300,000
Fixed
9,300,000
Gross Margin
Selling & Administrative
14,150,000
$
$
$
4,410,000
1,350,000
6,000,000
2,390,000
Commissions
Fixed Marketing Expenses
Fixed Administrative
Net Operating Income
Model 101
Model 201
Model 301
Normal Annual Sales Volume
16,000
19,000
11,000
Unit Selling Price
Variable expense per unit
$
$
650
750
1,100
250
200
500
Transcribed Image Text:Mirabel Manufacturing Budgeted Income Statement For the Year Ending December 31 $ Sales 36,750,000 Cost of goods sold: Variable $ 13,300,000 Fixed 9,300,000 Gross Margin Selling & Administrative 14,150,000 $ $ $ 4,410,000 1,350,000 6,000,000 2,390,000 Commissions Fixed Marketing Expenses Fixed Administrative Net Operating Income Model 101 Model 201 Model 301 Normal Annual Sales Volume 16,000 19,000 11,000 Unit Selling Price Variable expense per unit $ $ 650 750 1,100 250 200 500
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