ACCT 221 WEEK 5

There are two problems this week. Click the tab at the bottom of the spreadsheet to move to problem 2.

Best Harmonica Company manufactures and sells harmonicas to distributors. The model they produce sells to the distributors for $8.00 each. Following are cost estimates:

Sales

$3,480,000

Direct materials

543,750

Direct labor

761,250

Manufacturing overhead–variable

152,250

Manufacturing overhead–fixed

640,000

Selling expenses–variable

78,300

Selling expenses–fixed

300,000

Administrative expenses–variable

47,850

Administrative expenses–fixed

185,000

Instructions

A. Prepare a CVP income statement based on these cost estimates.

B. Commute contribution margin ratio.

C. Compute the break-even point in (1) units and (2) dollars.

D. Compute the margin of safety ratio.

E. Determine the sales dollars required to earn net income of $1,000,000.

Problem 2 involves a fixed asset decision.

FACTS:

1. Elliott Incorporated manufactures garden tools, and although the manufacturing equipment is perfectly functional, it is not modern.

2. Upgrading to modern equipment would speed up the manufacturing process such that direct labor and variable manufacturing costs

would be reduced by 40% on a per-unit basis. Hint: You do not need current units produced to calculate this problem.

3. The cost of such an upgrade would equal $1,500,000 per year for depreciation and financing costs net of tax benefits of these costs.

4. The additional costs would be accounted for as fixed manufacturing overhead.

5. Elliott is currently operating at full capacity and management believes they could increase sales to $6,000,000 at current prices if

they had additional capacity.

Elliott's current sales and costs are as follows:

Sales

$4,500,000

Direct materials

780,000

Direct labor

1,540,000

Manufacturing overhead–variable

364,500

Manufacturing overhead–fixed

750,000

Selling expenses–variable

90,000

Selling expenses–fixed

250,000

Administrative expenses–variable

60,000

Administrative expenses–fixed

200,000

a. Prepare a CVP for Elliott based on the current production.

b. Compute contribution margin ratio for current production.

c. Compute breakeven dollars for current production.

d. Prepare a CVP based on the proposed equipment upgrade.

e. Compute contribution margin ratio based on the proposed equipment upgrade.

f. Compute breakeven dollars for current production.

g. Should Elliott proceed with the proposed upgrade?