Executive management at Cup of Joe coffee shops is very pessimistic about the chain's ability to maintain current sales volume and estimates decreases in sales in each of the next six years. Decrease in the company's profit will be :minimum if management creates a(n) low leverage cost structure. O operating leverage does not affect decrease in profit. O cost structure does not affect decrease in profit. O medium leverage cost structure. O high leverage cost structure. O
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- Suppose you are analyzing a firm that is successfully executing a strategy that differentiates its products from those of its competitors. Because of this strategy, you project that next year the firm will generate 6.0% revenue growth from price increases and 3.0% revenue growth from sales volume increases. Assume that the firms production cost structure involves strictly variable costs. (That is, the cost to produce each unit of product remains the same.) Should you project that the firms gross profit will increase next year? If you project that the gross profit will increase, is the increase a result of volume growth, price growth, or both? Should you project that the firms gross profit margin (gross profit divided by sales) will increase next year? If you project that the gross profit margin will increase, is the increase a result of volume growth, price growth, or both?Danna Martin, president of Mays Electronics, was concerned about the end-of-the year marketing report that she had just received. According to Larry Savage, marketing manager, a price decrease for the coming year was again needed to maintain the companys annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of 18 per unit was producing a 2-per-unit profithalf the customary 4-per-unit profit. Foreign competitors kept reducing their prices. To match the latest reduction would reduce the price from 18 to 14. This would put the price below the cost to produce and sell it. How could these firms sell for such a low price? Determined to find out if there were problems with the companys operations, Danna decided to hire a consultant to evaluate the way in which the CBs were produced and sold. After two weeks, the consultant had identified the following activities and costs: The consultant indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least 7. Since the marketing manager had indicated that the market share (sales volume) for the boards could be increased by 50% if the price could be reduced to 12, Danna became quite excited. Required: 1. CONCEPTUAL CONNECTION What is activity-based management? What phases of activity analysis did the consultant provide? What else remains to be done? 2. CONCEPTUAL CONNECTION Identify as many nonvalue-added costs as possible. Compute the cost savings per unit that would be realized if these costs were eliminated. Was the consultant correct in the preliminary cost reduction assessment? Discuss actions that the company can take to reduce or eliminate the nonvalue-added activities. 3. Compute the unit cost required to maintain current market share, while earning a profit of 4 per unit. Now compute the unit cost required to expand sales by 50%, assuming a per-unit profit of 4. How much cost reduction would be required to achieve each unit cost? 4. Assume that further activity analysis revealed the following: switching to automated insertion would save 60,000 of engineering support and 90,000 of direct labor. Now, what is the total potential cost reduction per unit available from activity analysis? With these additional reductions, can Mays achieve the unit cost to maintain current sales? To increase it by 50%? What form of activity analysis is this: reduction, sharing, elimination, or selection? 5. CONCEPTUAL CONNECTION Calculate income based on current sales, prices, and costs. Then calculate the income by using a 14 price and a 12 price, assuming that the maximum cost reduction possible is achieved (including Requirement 4s reduction). What price should be selected?Glencoe First National Bank operated for years under the assumption that profitability can be increased by increasing dollar volumes. Historically, First Nationals efforts were directed toward increasing total dollars of sales and total dollars of account balances. In recent years, however, First Nationals profits have been eroding. Increased competition, particularly from savings and loan institutions, was the cause of the difficulties. As key managers discussed the banks problems, it became apparent that they had no idea what their products were costing. Upon reflection, they realized that they had often made decisions to offer a new product which promised to increase dollar balances without any consideration of what it cost to provide the service. After some discussion, the bank decided to hire a consultant to compute the costs of three products: checking accounts, personal loans, and the gold VISA. The consultant identified the following activities, costs, and activity drivers (annual data): The following annual information on the three products was also made available: In light of the new cost information, Larry Roberts, the bank president, wanted to know whether a decision made two years ago to modify the banks checking account product was sound. At that time, the service charge was eliminated on accounts with an average annual balance greater than 1,000. Based on increases in the total dollars in checking, Larry was pleased with the new product. The checking account product is described as follows: (1) checking account balances greater than 500 earn interest of 2 percent per year, and (2) a service charge of 5 per month is charged for balances less than 1,000. The bank earns 4 percent on checking account deposits. Fifty percent of the accounts are less than 500 and have an average balance of 400 per account. Ten percent of the accounts are between 500 and 1,000 and average 750 per account. Twenty-five percent of the accounts are between 1,000 and 2,767; the average balance is 2,000. The remaining accounts carry a balance greater than 2,767. The average balance for these accounts is 5,000. Research indicates that the 2,000 category was by far the greatest contributor to the increase in dollar volume when the checking account product was modified two years ago. Required: 1. Calculate rates for each activity. 2. Using the rates computed in Requirement 1, calculate the cost of each product. 3. Evaluate the checking account product. Are all accounts profitable? Compute the average annual profitability per account for the four categories of accounts described in the problem. What recommendations would you make to increase the profitability of the checking account product? (Break-even analysis for the unprofitable categories may be helpful.)
- 2. The sales for T-2 are decreasing and the purchase costs are increasing. The firm might drop T-2 and sell only T-1. Barbour allocates fixed costs to products on the basis of sales revenue. When the president of Barbour saw the income statements (see below), he agreed that T-2 should be dropped. If T-2 is dropped, sales of T-1 are expected to increase by 10% next year, but the firm’s cost structure will remain the same. T-1 T-2 Sales $ 245,000 $ 296,000 Variable costs: Cost of goods sold 79,000 148,000 Selling & administrative 19,000 59,000 Contribution margin $ 147,000 $ 89,000 Fixed expenses: Fixed corporate costs 69,000 84,000 Fixed selling and administrative 21,000 30,000 Total fixed expenses $ 90,000 $ 114,000 Operating income $ 57,000 $ (25,000 ) Required: 1. Find the expected change in annual operating income by dropping T-2 and selling only T-1. 2. By what percentage…Adams Inc. determines its expected sales for the next quarter as $800,000 and its margin of safety as 40% Which of the following statements is NOT true for the next quarter for Adams? Group of answer choices An operating loss will occur, if the sales drop by $320,000. The breakeven sales are determined to be $480,000 The company will make a breakeven, if the sales drops by 40%. if the sales drops more than 40%, an operating loss will occur.The Protek Company has been growing very fast, but profitability has declined from 11.85% to 2.36% in just two years. Costs have increased faster than sales and expenses are out of control. The Board of Directors has appointed Bob Smith to come up with some recommendations that are likely to help get the situation under control. He has made the following suggestions, but has hired you to actually put the numbers into proforma statements to present to the Board at their next meeting. Income Statement The company will slow down the growth of sales to 15% for the next year (20X4). Bob does not see any easy fixes to the cost of good sold situation, so those will go up 15% in line with sales, leading to the same gross margin percent as this past year. Bob has decided that the budgets for the Marketing and Research and Development departments should be exactly the same dollar amount as in 20X3. He feels that imposing that particular discipline to the Marketing Department will be good for…
- To increase Sales and Sales Growth, the top Marketing Manager suggested to price products slightly lower than the main competitor and at the same time increase product quality (competitor is not expected to react or make changes). This strategy would require an initial one time investment today of $1 million in advertising (and for some machines) and the Net Profit Margin (and Cash Flows) will be zero for years 1, 2, 3. However, sales are expected to grow 20% in years 1,2,3 (then sales will stabilize and sales growth will be 1% in year 4 and over). Also, in year 4 Net Profit Margin will return to 5% (due to economies of scale). (Some numbers have been pre-filled in the tables below). CURRENT BUSINESS SITUATION END OF YEAR 0 1 … Sales Growth 0% … Net Profit Margin 5% … Sales ($Millions) 80.00 … Profit or Cash Flow 4.00 … NPV(i=.15) 26.67 $Millions SUGGESTED SALES…Company D's top management is growing concerned that one of its divisions, Division D, will not be able to meet its current period income goals. Division D uses absorption costing for internal profit reporting and had an adequate level of inventory at the beginning of the period. Division D's manager knows that he can raise profits by increasing production at the end of the period. The increased production will allocate fixed costs over a greater number of units. This, in turn, will reduce cost of goods sold and increase earnings. However, it is unlikely that the additional production will be sold, resulting in a large ending inventory balance. The manager of Division D has come to Alfonso Yates, the divisional controller, to find out exactly how much additional production is needed to increase net income enough to meet the division's profit goals. Alfonso analyzes Division D's financial numbers and determines that the division will need to increase inventory by 25% in order to absorb…Company D's top management is growing concerned that one of its divisions, Division D, will not be able to meet its current period income goals. Division D uses absorption costing for internal profit reporting and had an adequate level of inventory at the beginning of the period. Division D's manager knows that he can raise profits by increasing production at the end of the period. The increased production will allocate fixed costs over a greater number of units. This, in turn, will reduce cost of goods sold and increase earnings. However, it is unlikely that the additional production will be sold, resulting in a large ending inventory balance. The manager of Division D has come to Alfonso Yates, the divisional controller, to find out exactly how much additional production is needed to increase net income enough to meet the division's profit goals. Alfonso analyzes Division D's financial numbers and determines that the division will need to increase inventory by 25% in order to absorb…
- A service company has the following financial information (in millions of $)a. What is the profit leverage effect of reducing the cost of the facilitating goods in this company?b. It has been suggested that the in-house services costs could be reduced by 10 percent in the coming year by implementing lean systems. What effect would thisohave on earnings increase in percentage?c. What is the profit leverage effect of in-house services relative to profits?In response to the weak economy, your company’ssales force is urging you, the sales manager, to changesales terms from 1/10, n/30 to 2/10, n/45. Explain whatthese terms mean and how this switch could increase ordecrease your company’s profits.Return on Investment, Margin, Turnover Ready Electronics is facing stiff competition from imported goods. Its operating income margin has been declining steadily for the past several years. The company has been forced to lower prices so that it can maintain its market share. The operating results for the past 3 years are as follows: Year 1 Year 2 Year 3 Sales $12,000,000 $ 9,500,000 $ 9,000,000 Operating income 1,200,000 1,195,000 945,000 Average assets 15,000,000 15,000,000 17,750,000 For the coming year, Ready's president plans to install a JIT purchasing and manufacturing system. She estimates that inventories will be reduced by 70% during the first year of operations, producing a 20% reduction in the average operating assets of the company, which would remain unchanged without the JIT system. She also estimates that sales and operating income will be restored to Year 1 levels because of simultaneous reductions in operating expenses and selling prices. Lower selling…