CVP Project Data Accounting 1B Trump Company is a small but growing manufacturer
ID: 2548581 • Letter: C
Question
CVP Project Data Accounting 1B Trump Company is a small but growing manufacturer of telecommunications equipment The company does not have its own sales force; rather, it relies completely on independent sales agents to market its products. These agents are paid a commission of 15% of selling price for all items sold Paul Ryan, Trump' s controller has just prepared the company's budgeted income statement for next year The statement follows TRUMP COMPANY BUDGETED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31 SALES MANUFACTURING COSTS $16,000,000 VARIABLE FIXED $7,200,000 2,340,000 9,540 000 6,460,000 GROSS MARGIN SELLING&ADMIN; COSTS COMMISSION TO AGENTS FIXED MARKETING COSTS FIXED ADMIN COSTS 2,400,000 120,000* 1,800,0004,320,000 2,140 000 NET OPERATING INCOME primarily depreciation on storage facilities As Ryan handed the statement to Donald Trump, Trump's president, he commented, "I went ahead and used the agents, 15% commission rate in completing these statements, but we've just learned that they refuse to handle our products next year unless we increase the commission rate to 20% Mr. Trump replied angrily. "Those agents have been demanding more and more and this time they have gone too far How can they possibly defend a 20% commission rate?" I say it's time we dumped those guys and got our own sales force Ryan replied "We've already worked them up. Several companies we know pay about commission to their own salespeople, along with a small salary Of course, we would have to handle all promotion costs too. We figure our fixed costs would increase by $2,400,000 per year, but we do not have to pay $3.200,000 20% x $16,000,000) commissions to the agents . The breakdown of the $2,400,000 cost figure is as follows Salaries Sales manager Salespersons Travel and Entertainment Advertising $ 100,000 600,000 400,000 Total $2.400.000 Super," replied Mr. Trump. 'and I note that the $2,400,000 is just what we are paying the agents under the old 15% commission rate .Explanation / Answer
REQ-A Current Situation: Sales 16,000,000 Variable cost: Manufacturing cost 7,200,000 Sales commission 2,400,000 Contribution margin 6,400,000 CM ratio: Contribution / Sales 40% Situattion 1: Commission rate increased to 20% Revised CM ratio = 40% -5% (increase in commission rate) =35% Situation 2-Employ own Sales force Revised CM ratio =40%+7.5% =47.5% Revised Fixed cost: Current fixed cost (2340,000+120,000+1800,000) 4260000 Add: Increase in fixed cost due to fixed sales staff 2,400,000 Less: Decrease in Audit expense -75000 Revised Fixed cost: 6,735,000 BREAK EVEN POINT CURRRENT SITUATION 1 SITUATION 2 Fixed cost 4,260,000 4260000 6735000 CM ratio 40% 35% 47.50% Break even sales in $ 10650000 12171428.6 14178947.4 (Fixed cost / CM ratio) Req B: Target Profit: $2140,000 CM ratio: 35% Fixed cost: 4260,000 Desired contribution: 4260,000+2140,000 = $6400,000 Target sales in $: Desired contribution / CM ratio *100 $ 6400,000 /35% =$18285,714