QUESTION
Requirements:
-
Answer the questions at the end of the case assignment.
Provide all supporting calculations.
-
Summarize the results of your analysis for requirement six in a one-page report.
This report must be typed.
Note: You may not work with other students on this case. The submitted work must be your own work. To ensure successful completion of the course it is essential that you submit the case assignment by its due date.
Rounding: when calculating break even round the CM ratio as a decimal to four decimal places. Example: .4957 or 49.57%.
Coffee Perfection, Inc. makes two products – Dream Coffee Machine and Out-Of-This-World Coffee Machine. Selected information on the products is given below:
|
Dream Coffee Machine |
Out-Of-This-World Coffee Machine |
|
|
Selling Price per unit: |
$1,000.00 |
$5,000.00 |
|
Variable expenses per unit: |
||
|
Production |
$490.00 |
$4,000.00 |
|
Commission (5% of selling price) |
$50.00 |
$250.00 |
The company has the following fixed costs:
-
Per Month
Fixed production costs
$650,000
Advertising expense
1,000,000
Administrative salaries
400,000
Total:
2,050,000
Sales, in units, over the past two months have been as follows:
|
|
Dream Coffee Machine |
Out-Of-This-World Coffee Machine |
Total |
|
February (units sold) |
20,000 |
5,000 |
25,000 |
|
March (units sold) |
15,000 |
6,000 |
21,000 |
Required:
1. Prepare contribution income statements for February and March. Use Exhibit 5-4 on page 211 as an example.
2. Compute the company’s break-even point (BEP) in dollar sales for February and March.
3. To meet customer demand the company decides to use new technology for the Out-Of-This-World Coffee Machine starting in the month of April. This decision drives the production cost to $4,500 per unit. Prepare a contribution income statement for April assuming that the company had the following sales activity:
|
Dream Coffee Machine |
Out-Of-This-World Coffee Machine |
Total |
|
|
April (units sold) |
10,000 |
10,500 |
20,500 |
4. Compute the company’s break-even point in dollar sales for April.
5. Assume that in addition to the cost structure change in April, the Sales Department is requesting a switch from commission compensation to salary compensation to become effective in May. This will eliminate the commission variable cost but will create additional fixed cost of $1,900,000. The activity level and the cost structure outside the commission-salary conversion will remain consistent with April data (requirement 3). Prepare a contribution income statement and compute the break-even point in dollar sales for the new cost structure (use the data given in instructions 3 & 5).
6. The CFO of the company assigns you to research the following two issues:
-
To analyze the impact on the break-even point in instructions 3 and 5. Do you support the decisions made? Why or why not.
-
Perform an analysis on the current and proposed sales compensation structure. What strategies can be implemented in the sales commission structure to result in increased profits and efficiency for the company?
Write an official memo to the president of the company to disclose your findings and possible recommendations.
ANSWER
Answer 6.
Memorandum
To
The President , Coffee Perfection Inc.
Sub: Financial cost and sales reviews
As per the directions given by the company, the following research have done and summarised below.
According to the concepts of cost, break even point is the point of indifference where the sales of the company are equals to the total cost of the products sold. In situation 3, the production cost of the out of the world coffee machine has increased by $500 per machine resulting in a break even sales of $ 8200000. However, in situation 5 the fixed costs of the company rises by $19,00,000 keeping all the costs at the same level. In situation 5, the break even sales approached to $1,31,66,666.67. it is not profitable for the company to cut down the sales commission requirements on sales and incorporating the same through the salaries. Because cutting commission down results in higher break even sales. Thus, the company can not be able to achieve higher profits even in case of higher sales.
The current sales compensation structure compels the company to pay commission to the sales personnels on unit basis . however, the proposed structure increases the fixed cost through cutting down the unit wise commission and incorporating the same in salaries. The later compensation structure is profitable in case of higher sales. As the company is at growing stage and the sales are growing the company should have the later strategy.
ANSWER 1
| Statement of contribution income: | ||
|
Dream coffee Machine |
Out of this world coffee machine |
|
| Selling price |
$1,000.00 |
$5,000.00 |
| Variable Expenses Per unit |
$540.00 |
$4,250.00 |
| Contribution/unit |
$460.00 |
$750.00 |
| February | ||
| Units Sold | 20,000.00 |
5,000.00 |
| Contribution Income |
$92,00,000.00 |
$37,50,000.00 |
| March | ||
| Units Sold | 15,000.00 | 6,000.00 |
| Contribution Income |
$69,00,000.00 |
$45,00,000.00 |
| Total contribution income | ||
| In February | $1,29,50,000.00 | |
| In March | $1,14,00,000.00 | |
Answer 2:
Answer 3:
Answer 4:
Answer 5:
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