You are the Certified Managerial Accountant (CMA) for Southwood Company. You have worked for the company for several years and your responsibilities include working with managers to analyze business decisions by allocating production costs to goods and creating budgets and production forecasts. You also provide information to the external accountant for the preparation of the financial statements. Your opinion is well respected and you have successfully worked with management on several big projects in the past. Southwood Company manufactures a single line of footballs in a small plant. Management has been meeting on several ideas they are considering about expansion of the plant as well as your advice on which would be the best alternative for production. After you have prepared the journal entries and income statement for the current year, management has asked you to review the data related to the proposed scenarios and prepare a presentation for top management. Part One: Management has been meeting about different scenarios they have considered to increase sales and improve profitability. They would like to see the results of these scenarios and have sat down with you to have you provide information to help with their decision. Prepare the following items for Management. 1. Compute the CM ratio (round variable expenses to the nearest dollar) and the break-even point in balls and the degree of operating leverage at the given sales levels. 2. Due to an increase in labor rates, the company estimates that variable expenses will increase by $2 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what are the new CM ratio and the break-even point in balls? 3. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income as last year? 4. The president feels that the company must raise the selling price of the footballs if the variable expenses increase by $2. If Southwood Company wants to maintain the same CM ratio as the current year, what selling price per ball must it charge to cover the increased costs? (round to the nearest dollar) 5. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses by 40% per ball, but it would cause fixed expenses per year to double. If the new plant is built, what are the company's new CM ratio and the break-even point in balls? 6. Prepare a contribution format income statement and compute the degree of operating leverage with the assumption that the new plant is built in the next year and the company manufactures 50,000 balls. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies on heavily on direct labor workers, thus variable expenses are $14 per ball, of which 56% is direct labor cost. Last year, the company sold 50,636 balls with the following results (rounded): Sales (50,636 balls) ......................................................... $ 1, 265, 900 Variable Expenses ........................................................ 708, 904 Contribution Margin ....................................................... 557,000 Fixed Expenses ............................................................... 310,000 Net operating income .................................................... 247,000 Selling & Admin expenses totaling $310,000 are broken down (based on actual performance, 50,000 balls sold): Sales Commission: $63, 000 Administrative salaries: $90,000. Rent Expense: $5,000 Advertising Expense: $140,000 Depreciation expense: $12,000 Part Two: Management would like to see budget comparisons between continuing operations with the existing plant or opening a new plant. After a review of operations and expenses Management has provided the following information. Prepare a budget comparing operating in the new plant versus continuing operations in the existing plant. 1. Opening new plant: The sales price remains at $25, with an estimated 55,000 basketballs sold based on additional advertising. o, Use variable expenses calculated from #5 in Part I. o Do not estimate any Overhead variance o Sales commissions are 5% of gross sales. o Administrative salaries remain unchanged. o Rent expense is eliminated because the new plant offers space for administration. o Management has decided to increase the advertising budget by 20%. o Depreciation on the new plant is $250,000, this is in addition to current depreciation on selling and administrative equipment. 2. Keeping existing plant: o Sales price is increased to $29, sales decline to 48,000 because of the price increase. o Use variable expenses calculated from # 4, Part I o Do not estimate any Overhead variance o Sales commissions are 5% of gross sales. o Administrative salaries, rent and advertising increase by 5% because of the increase in costs. o Depreciation expense is $10,000 on selling and administrative equipment.
You are the Certified
company for several years and your responsibilities include working with managers to analyze business
decisions by allocating production costs to goods and creating budgets and production
well respected and you have successfully worked with management on several big projects in the past.
Southwood Company manufactures a single line of footballs in a small plant. Management has been
meeting on several ideas they are considering about expansion of the plant as well as your advice on
which would be the best alternative for production. After you have prepared the
statement for the current year, management has asked you to review the data related to the proposed
scenarios and prepare a presentation for top management.
Part One: Management has been meeting about different scenarios they have considered to increase
sales and improve profitability. They would like to see the results of these scenarios and have sat down
with you to have you provide information to help with their decision. Prepare the following items for
Management.
1. Compute the CM ratio (round variable expenses to the nearest dollar) and the break-even point in balls and
the degree of operating leverage at the given sales levels.
2. Due to an increase in labor rates, the company estimates that variable expenses will increase by $2 per
ball next year. If this change takes place and the selling price per ball remains constant at $25, what are the
new CM ratio and the break-even point in balls?
3. If the expected change in variable expenses takes place, how many balls will have to be sold next year to
earn the same net operating income as last year?
4. The president feels that the company must raise the selling price of the footballs if the variable expenses
increase by $2. If Southwood Company wants to maintain the same CM ratio as the current year, what
selling price per ball must it charge to cover the increased costs? (round to the nearest dollar)
5. The company is discussing the construction of a new, automated manufacturing plant. The new plant
would slash variable expenses by 40% per ball, but it would cause fixed expenses per year to double. If
the new plant is built, what are the company's new CM ratio and the break-even point in balls?
6. Prepare a contribution format income statement and compute the degree of operating leverage with the
assumption that the new plant is built in the next year and the company manufactures 50,000 balls.
The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies on
heavily on direct labor workers, thus variable expenses are $14 per ball, of which 56% is direct labor cost.
Last year, the company sold 50,636 balls with the following results (rounded):
Sales (50,636 balls) ......................................................... $ 1, 265, 900
Variable Expenses ........................................................ 708, 904
Contribution Margin ....................................................... 557,000
Fixed Expenses ............................................................... 310,000
Net operating income .................................................... 247,000
Selling & Admin expenses totaling $310,000 are broken down (based on actual performance, 50,000 balls
sold):
Sales Commission: $63, 000
Administrative salaries: $90,000.
Rent Expense: $5,000
Advertising Expense: $140,000
Part Two: Management would like to see budget comparisons between continuing operations with the
existing plant or opening a new plant. After a review of operations and expenses Management has
provided the following information. Prepare a budget comparing operating in the new plant versus
continuing operations in the existing plant.
1. Opening new plant:
The sales price remains at $25, with an estimated 55,000 basketballs sold based on additional advertising.
o, Use variable expenses calculated from #5 in Part I.
o Do not estimate any
o Sales commissions are 5% of gross sales.
o Administrative salaries remain unchanged.
o Rent expense is eliminated because the new plant offers space for administration.
o Management has decided to increase the advertising budget by 20%.
o Depreciation on the new plant is $250,000, this is in addition to current depreciation on selling
and administrative equipment.
2. Keeping existing plant:
o Sales price is increased to $29, sales decline to 48,000 because of the price increase.
o Use variable expenses calculated from # 4, Part I
o Do not estimate any Overhead variance
o Sales commissions are 5% of gross sales.
o Administrative salaries, rent and advertising increase by 5% because of the increase in costs.
o Depreciation expense is $10,000 on selling and administrative equipment.
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