Minden Company produces plastic patio furniture. Summary data from its 2013 inco
ID: 2520110 • Letter: M
Question
Minden Company produces plastic patio furniture. Summary data from its 2013 income statement are as follows:
Revenues- 4,000,000
Variable costs - 2,400,000
Fixed costs- 1, 728,000
Operating income- (128,000)
Angela Gore, Minden’s president, is worried about the company’s poor profitability. She asks Jenny Hilton, production manager, and Chris Jones, controller, to see if there are ways to reduce costs.
After 2 weeks, Jenny returns with a proposal to reduce variable costs to 52% of revenues by reducing the costs Minden currently incurs for safe disposal of wasted plastic. Chris is concerned that this would expose the company to potential environmental liabilities. He tells Jenny, “We would need to estimate some of these potential environmental costs and include them in our analysis.” “You can’t do that,” Jenny replies. “We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company and costing all of us our jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing.”
Required:
Calculate Minden Company’s breakeven revenues for 2013.
Calculate Minden Company’s breakeven revenues if variable costs are 52% of revenues.
Calculate Minden Company’s operating income for 2013 if variable costs had been 52% of revenues.
Given Jenny Hilton’s comments, what should Chris Jones do?
Explanation / Answer
(a) Break even revenue = Fixed cost/ Contributionin %
= 1728000/ 0.40
= $4320000
(b) if variable cost is 52 % then contribution would be 48 %
Break even revenue = Fixed cost/ Contributionin %
= 1728000/ 0.48
=$3600000
(c) Operating Profit
Revenue 4000000
Less: Variable cost 2080000 ( 4000000*52%)
Contribution 1920000
Less: Fixed Cost 1728000
Operating Profit 192000
Reduce variable cost to 52 %