Information: Using the information from WCB’s flexible budget, created for WCB P
ID: 2463036 • Letter: I
Question
Information:
Using the information from WCB’s flexible budget, created for WCB Part #5, perform a CVP analysis on the for power systems harmonics analysis line. In doing your analysis, you should use the management team’s best guess for next year’s performance: 500 analyses sold for $15,000 each.
Assignment:
1.Identify key assumptions: What are the key assumptions of a CVP analysis? How valid do you feel these assumptions are for WCB’s new line? Explain.
2.How many analyses must the company sell to break even?
3.What is the current safety margin on the new line?
4.Assuming that WCB has a 30% tax rate, how many analyses must the line sell in order to contribute $1,000,000 to WCB’s net income?
5.WCB’s sales manager has suggested that the company double direct advertising for the line in order to increase sales by 5%. Currently the line has $65,000 worth of direct advertising. Would you support her recommendation? Defend your answer.
WCB #5
Gross income Gross income Gross income Units 500 Units 650 Units 400 selling Price/Unit 15,000 selling Price/Unit 15,000 selling Price/Unit 16,000 Total Gross Income $7,500,000 Total Gross Income 9,750,000 Total Gross Income 6,400,000 Variable Costs/Unit Variable Costs/Unit Variable Costs/Unit Sales Expence 900 Sales Expence 900 Sales Expence 900 Sale Commissions 450 Sale Commissions 450 Sale Commissions 480 Variable S&A 210,000 Variable S&A 210,000 Variable S&A 210,000 Total Variable Costs 450,000 Total Variable Costs Total Variable Costs Sales Expenses 225,000 Sales Expenses 585,000 Sales Expenses 360,000 Sales Commissions 210,000 Sales Commissions 292,500 Sales Commissions 192,000 Variable S&A 885,000 Variable S&A 210,000 Variable S&A 210,000 Total Variable Costs Total Variable Costs 1,087,500 Total Variable Costs 762,000 Fixed Costs Fixed Costs Fixed Costs Administrative Support 400,000 Administrative Support 400,000 Administrative Support 400,000 Marketing Dept 200,000 Marketing Dept 200,000 Marketing Dept 200,000 Direct Supervisor Salaries 150,000 Direct Supervisor Salaries 150,000 Direct Supervisor Salaries 150,000 Direct Advertising 65,000 Direct Advertising 65,000 Direct Advertising 65,000 Depreciation /Year 370,000 Depreciation /Year 370,000 Depreciation /Year 370,000 Total Fixed Costs 1,185,000 Total Fixed Costs 1,185,000 Total Fixed Costs 1,185,000 Total Costs for Producing 500 Units 2,070,000 Total Costs for Producing 500 Units 2,272,500 Total Costs for Producing 500 Units 1,947,000 Net Incmoe $5,430,000 Net Incmoe 7,477,500 Net Incmoe 4,453,000Explanation / Answer
1.
Assumptions of Cost-Volume-Profit (CVP) Analysis:
All the above mentioned assumptions are valid for new line of business of WCB as there is no extraordinary situation in this company.
2.
Compute break-even point:
Break-even point (in units) = Fixed cost / Contribution per analyses
= $1,185,000 / [$15,000-($900+$450+$210,000/500)]
= $1,185,000 / $13,230
= 89.57 analyses or 90 (rounded to nearest unit) analyses must be sold to breakeven.
3.
Compute the current safety margin on the new line:
Safety margin = Sales – break even sale
Break even sale = Fixed cost / (contribution / Sales)*100
= $1,185,000 / {[$15,000-($900+$450+$210,000/500)]/ $15,000}*100
= $1,185,000 / 0.882
= $1,343,537.41
% of breakeven sales = $1,343,537.41 / ($15,000*500)
= 17.91%
Therefore, safety margin = 100%-17.91%
= 82.19%
4.
Number of units to be sold for desired net income:
Number of units to be sold = Desired contribution / Contribution per unit
= ($1,185,000 + $1,000,000) / $13,230
= 165 analyses must be sold for desired net income.
Note: All the above answers are solved using the information in the first column of the above table at 500 units sold.