Status: QUESTION 1 1sseWashington & Brothers reports the following information f
ID: 2407564 • Letter: S
Question
Status: QUESTION 1 1sseWashington & Brothers reports the following information for the month of July Sales (5,000 units) Variable Costs $ 325,000 Contribution Margin Fixed Costs Net Income (Loss) 115,000 $ 40,000 Management is considering the following as potential strategies to increase sales. A Increase fixed costs, $15,000 C Increase sales price by 7 5% What is the net income under any two strategies? increase variable cost to 70% of sales REQUIRED Based on the two strateties you selected which one do you recomme e Soue and Siómt to save and submit, CHick Sauve All Anwr to ov all aExplanation / Answer
1 Income under different strategies: A. Increase fixed costs $ 15000 Contribution margin 115000 Less: Fixed costs (75000+15000) 90000 Net income 25000 B. Increase variable cost to 70% of sales Sales 325000 Less: Variable costs (325000*70%) 227500 Contribution margin 97500 Less: Fixed costs 75000 Net income 22500 C. Increase sales price by 7.5% Sales (325000*107.5%) 349375 Less: Variable costs (210000*107.5%) 225750 Contribution margin 123625 Less: Fixed costs 75000 Net income 48625 2 Break even point=Fixed cost/Weighted average of contrbution margin Weighted average of contribution margin: Contribution Weight Weighted average of contribution margin 30 0.2 6 25 0.45 11.25 35 0.35 12.25 29.5 Break even point=4650000/29.5=157627.10=157627 units Allocation of sales units to 3 products on the basis of sales mix Roto-Tillers 157627*20% 31526 units Leaf Blowers 157627*45% 70932 units Hedge Trimmers 157627*35% 55169 units 157627 3 1 Operating leverage=Contribution margin/Net income Backerfield Johnsons Contribution margin 520000 900000 Net income 360000 550000 Operating leverage 1.4444 1.6364 2 Operating leverage how a company's net income changes according to the change in revenue In case of backerfield,If there is a change in revenue,Net income would change 1.44 times of revenue change In case of Johnsons,If there is a change in revenue,Net income would change 1.64 times of revenue change 3 If the sales revenue decreases by 15% In case of Backerfield,Net income would decrease by=1.4444*15=21.6667% In case of Johnsons,Net income would decrease by=1.6364*15=25.5455% CVP income statement will reveal net income as follows: Backerfield Johnsons Current net income 360000 550000 Decrease in net income 78000 135000 (360000*21.6667%) (550000*24.5455%) Revised net income 282000 415000 Johnsons will be worse off than the Backerfield due to high operating leverage