Part I. Review the information that Evan provided to you in Project 1. He has now included additional information about the production and sale of 60,000 basketballs. Evan knows that the market price per basketball is $12.00 and the unit variable cost is $6.00.
Additional factors to consider:
Note: For purposes of this Project, assume that “Total direct costs” calculated in Project 1 are variable and “Total indirect costs” calculated in Project 1 are fixed.
Delegate your assignment to our experts and they will do the rest.
Factory rent is paid per square foot.
Total available production square footage is 20,000 and Acme’s Sporting Goods Division is currently using only 80% of this capacity.
Acme records the cost of unused capacity as a separate line item and not as a product cost.
Acme Sporting Goods Division
Product Line Data
For the Year Ended December 31, 2015
| Product | Units Manufactured | Contribution Margin /Unit | Actual Sales Units 2015 | Projected Sales Units 2016 |
| Basketballs | 58,000 | $6 per unit | 60,000 1 | 70,000 |
Using the above information, answer the following questions. Be sure to show all of your calculations in the boxes provided.
Compute the contribution margin ratio for basketballs.
|
Contribution margin ratio = contribution margin / sales Where contribution margin = sales (S) – variable costs (V)( Assaf & Josiassen, 2016) . contribution margin= $12-$6 =$ 6 = S-V/S = $6/ 12 = 0.5 50% |
What is the breakeven point for the basketball product line in units ?
0 = (S×Q) − (V×Q) – F 0 = 12Q-6Q- 209,926.64 0 = 6Q- 209,926.64 Q= 34,987 units |
What is the breakeven point for the basketball product line in dollars ?
|
209,926/ contribution margin ratio 209,926/0.5 = $419,852 |
What is the total product line income for basketballs?
|
Part II. As Evan explained, Acme’s top management is contemplating adding baseball bats as a fourth product line for 2016. Similar machines are used to create basketballs and baseball bats. Examine the following projected 2016 operating income statement data from Evan for the baseball bat product line:
Units: 50,000 Bats
| Revenues |
$500,000 |
| Cost of Goods Sold | |
| Variable Manufacturing Costs |
$275,000 |
| Operating Costs | |
| Variable Marketing Costs |
$25,000 |
| Fixed Setup Costs and Maintenance |
$33,000 |
| Fixed Maintenance Costs |
$40,000 |
| Fixed General and Administrative Costs |
$15,000 |
With this information in mind, answer the following questions. Be sure to show all of your calculations in the boxes provided.
Calculate the 2016 contribution margin ratio, breakeven point in both units and dollars, and margin of safety in both units and dollars for bats assuming sales of 45,000 bats.
|
Contribution Margin Ratio: Contribution margin ratio = contribution margin / sales, where contribution margin = sales – variable costs. S= 500,000/50,000units = $10 V= 300,000/50,000units V=$6 S-V/S (10-6)/ 10 4/10 = 0.40 = 40% Breakeven Point (in units and dollars): Breakeven Point in dollars = fixed costs/ contribution margin ratio ($33,000+$40,000+$15,000)/ 0.40 88,000/0.40 = $220,0000 The equation for breakeven points for a single product firm in units
0 = (S×Q) − (V×Q) – F 0 = 10Q-6Q-88,000 0 = 4Q-88,000 Q= 22,000 units The margin of Safety (in units and dollars): The equation of Margin of Safety for units ( Budget Sales $ - Breakeven Sales $) / Budget Selling Price per Unit $450,000-$220,0000/10 = $230,000/10 23,0000 units The equation of Margin of Safety for dollars Units x Selling Price 23,000 X10= $230,000 |
Using the projected unit sales for 2016, explain how contribution margin and differential analysis would be used by Acme to determine whether the new product line of baseball bats should be pursued.
|
Contribution margin can be used to determine fair pricing that will help establish fair prices that might ensure all the baseball bats are sold. In Acme’s case, the contribution margin of baseball bats is at 40% the percentage is below average (50 percent) implying the business is not very profitable ( Klychova, Safiullin, & Zakirova, 2014) . Considering that baseball bats are a new product the company should continue to manufacture them, and if the contribution margin remains the same or drop below 40 percent in the two subsequent years, then the Acme should stop to manufacture baseball bats since low contribution margin implies the company is making low or no profit. Differential analysis can be used to add or eliminate products. In Acme company for instance, the company’s projected sales were 50,000 units. All the projected sales of bats were sold. Hence there was no impact on the financial statement of the company, and therefore the new product can be pursued. |
Comparing your analyses of the basketball and baseball bat product lines, do you recommend that the Sporting Goods Division double the number of basketballs produced at Acme OR add the production of baseball bats to Acme’s product line instead? Describe your findings and explain your rationale.
| I would recommend that Acme doubles the number of basketballs produced. Baseball bats are a new product; it will require more time for its sales to upsurge basing on the contribution margin ratio which is at 40 percent (below average) ( Navaneetha, Punitha, Joseph, Rashmi, & Aishwariyaa, 2016) . Also, the contribution margin of the two products depicts that baseball is the preferred product which the clients buy in large quantity. The contribution margin of basketball is high compared to baseball bats; this implies that the company makes more profit through manufacturing of basketball than baseball bats. |
References
Assaf, A. G., & Josiassen, A. (2016). Frontier analysis: A state-of-the-art review and meta-analysis. Journal of Travel Research , 55 (5), 612-627.
Klemstine, C. F., & Maher, M. (2014). Management Accounting Research (RLE Accounting): A Review and Annotated Bibliography . Routledge.
Klychova, G. S., Safiullin, L. N., & Zakirova, A. R. (2014). Information-analitical support of cost management in horse breeding. Mediterranean Journal of Social Sciences , 5 (18), 193.
Marshall, D. (2016). Accounting: what the numbers mean . McGraw-Hill Higher Education.
Navaneetha, B., Punitha, K., Joseph, R. M., Rashmi, S., & Aishwariyaa, T. S. (2016). An Analysis of Cost Volume Profit of Nestlé Limited.
1 Note: Sales may exceed units manufactured due to available existing inventory.
