Basics of CVP analysis,. Harwood Company manufactures a product that sells for $20 per and Variable costs are $8 per unit, and fixed costs total $180,000 per year
Required:
Answer the following independent questions
1 What is the product's C/M ratio,
2. Use the C/M ratio to determine the break-even point in sales dollars.
3. Due to an increase in demand, the sales manager estimates that sales will increase by $75,000 during the next year. By how much should net income increase (or net loss decrease). assuming Nat fixed costs do not change?
Assume that operating results for last year were:
| Sales |
$400,000 |
| Less variable expenses |
160000 |
| Contribution margin |
240,000 |
| Less fixed expenses |
180,000 |
| Net income |
$60,000 |
a. Complete the degree of operating leverage at the current level of sales.
b. The president expects sales to increase by 20 percent next year. BY what percentage should net income increase ?
5. Refer to the original data Assume that the company sold 18000 units last year. The sales Manager is convinced that a 10 percent reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in kits to increase by one third. Prepare two contribution income statements, one showing the results of last year, operation and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager suggests,
6. Refer to the original data. Assume again Mat the company sold 18000 units last year. The
president does not want to change the selling price. Instead, he wants to increase the salts commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25 percent. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach
7 Refer to the original data. Assume that due to a recession the company is selling only 14000 units per year. An order has been received from a wholesale distributer who wants to purchase 4,000 units on a special price basis.
What unit price would have to be quoted to the distributor if Harwood Company wants to earn an overall profit of $20,000 per year? (Present sales would not be disturbed by this special order.)