Above is my estimated income statement in the year 2007 for a certain product. W
ID: 341030 • Letter: A
Question
Above is my estimated income statement in the year 2007 for a certain product. While in production in the year 2007, the engineers had found a product defect that involved .25% of all units produced.
The production, quality and product managers considered the option to be producing and selling flawed units for 6 months while engineers corrected the problem. Under this option, the company would not disclose the problem and hope for the best. Perhaps none of the product claims would involve any injury; only product replacement would be required at a cost of about $12 per unit.
a. Adjust the 2007 budget for an assumed defect rate of .25% for 6 months production. (Note this is a defect rate in addition to the normal rate faced in each year, 2002-2006, which is already accounted for in marketing cost.) (IS THIS ADDED ONTO THE VARIABLE COGS OR WOULD I ADD IT TO THE MARKETING COSTS? PLEASE EXPLAIN)
b. Adjust the fixed production cost for 2007 for an additional $2,000,000 in design engineering to solve the problem within a 6-month period. (This will involve the use of overtime and consultants).
Chef Marco's Choice, Inc. Premium Grade Ovenware Estimated Product Income Statement For the years ended December 31, 2007 Sales Sales In Units Cost Of Goods Sold Variable Fixed | (1,500,000*4 Quarters)*($15-10%) $81,000,000 6,000,000 1,500,000*4 Quarters (1,500,000*4 Quarters)"($5.55-3590) ($23,221,033+3.5%) [$81,000,000 ($21,450,000+ $24,033.769)1 $21,450,000 $24,033,769 Gross Profit S35,516,231 Attributable Costs Marketing Other (primarily fixed) Product line profit before G&A; allocation Return on sales $5,670,000 $2,580,475 $27,265,756 33.65% $81,000,000*700 $2,517,537 + 2.5% ,231 (S5,670,000 + $2,580,475) ($27,256,756/$8 1 ,000,000)#100Explanation / Answer
Cost of replacement of defective product need to added to added to COGS.
Premium Grade Ovenware Estimated Product Income Statement For the year Ended December 31, 2007 Remarks Sales (1,500,000*4 Quarters)*($15-10%) $ 81,000,000.00 Sales in Units 1,500,000*4 Quarters 6,000,000.00 Cost of Goods Sold Variable (1,500,000*4 Quarters)*($5.50-35%) $ 21,450,000.00 Fixed ($23,221,033+3.5%+2,000,000) $ 26,033,769.01 Adjusted the fixed production cost for 2007 for an additional $2,000,000 in design engineering to solve the problem within a 6-month period Defective Products in Units (1,500,000*2 Quarters*0.25%) 7,500.00 Cost of Replacement of defective products ($ 7,500*12) $ 90,000.00 Gross Profit $ 33,426,231.00 Attributable Cost Marketing $81,000,000*7% 5,670,000.00 Other (Primarily Fixed) $ 2,517,537 +2.5% 2,580,475.00 Product line profit before G&A Allocation $ 33,426,231 - ($ 5,670,000 + $ 2,580,475) 25,175,756.00 Return on Sales ($ 25,175,756 /$ 81,000,000*100) 31.08%