ABC Inc. Includes The Data For 2010 Sales: 80,000 Units
Abc Inc Includes The Following Data For 2010sales 80000 Units 5
Abc Inc includes the following data for 2010: Sales of 80,000 units totaling $5,660,000, with a cost of goods sold (COGS) of $2,100,000, gross profit of $3,560,000, selling expenses of $1,500,000, and administrative expenses of $900,000. Income from operations is $1,160,000. COGS is equally divided between fixed and variable costs. Fixed costs constitute 30% of selling expenses, while variable costs account for 40% of administrative expenses. A proposed new product could increase sales by $884,375, add fixed costs of $265,000, but will not alter the relationship between sales and variable costs. This analysis aims to evaluate the financial impact of the proposed product.
Paper For Above instruction
Introduction
Analyzing a company's cost structure and profitability involves understanding fixed and variable costs and their relationships with sales. In this context, ABC Inc.'s financial data from 2010 provides a foundation for assessing current expenses, break-even points, and the effects of introducing a new product. This comprehensive analysis computes total fixed and variable costs, unit variable cost, contribution margin, break-even units, and explores scenarios considering the proposed product, including the maximum possible income and the impact on 2011 operations. Such insights inform strategic decision-making on product expansion and cost management.
Total Fixed and Variable Costs for 2010
To determine total fixed and variable costs, we first analyze the given expenses and their proportions. COGS, of $2,100,000, is evenly split between fixed and variable costs, implying each accounts for half of COGS:
- Fixed COGS = $1,050,000
- Variable COGS = $1,050,000
Selling expenses are $1,500,000, with fixed costs constituting 30%. Hence:
- Fixed selling expenses = 30% of $1,500,000 = $450,000
- Variable selling expenses = 70% of $1,500,000 = $1,050,000
Similarly, administrative expenses are $900,000, with variable costs being 40%:
- Variable administrative expenses = 40% of $900,000 = $360,000
- Fixed administrative expenses = 60% of $900,000 = $540,000
Adding fixed costs:
- Fixed COGS = $1,050,000
- Fixed selling expenses = $450,000
- Fixed administrative expenses = $540,000
Total fixed costs = $1,050,000 + $450,000 + $540,000 = $2,040,000
Total variable costs:
- Variable COGS = $1,050,000
- Variable selling expenses = $1,050,000
- Variable administrative expenses = $360,000
Total variable costs = $1,050,000 + $1,050,000 + $360,000 = $2,460,000
Unit Variable Cost and Contribution Margin
Total units sold in 2010 are 80,000. The total variable costs amount to $2,460,000; therefore:
- Unit Variable Cost = Total Variable Costs / Units Sold = $2,460,000 / 80,000 = $30.75
The selling price per unit:
- Sale price per unit = Total sales / Units sold = $5,660,000 / 80,000 = $70.75
The contribution margin per unit:
- Contribution Margin = Sale Price - Variable Cost per Unit = $70.75 - $30.75 = $40.00
This margin represents the amount contributed towards covering fixed costs and generating profit per unit.
Break-even Unit Sales for 2010
Break-even point in units occurs when total contribution margin equals total fixed costs:
- Break-even units = Fixed Costs / Contribution Margin per unit = $2,040,000 / $40.00 = 51,000 units
At this sales volume, ABC Inc would cover all fixed costs, with no profit or loss.
Break-even Unit Sales Considering the Proposed New Product
The new product is expected to increase sales revenue by $884,375 and fixed costs by $265,000. Since the relationship between sales and variable costs remains unchanged, the contribution margin per unit (= $40) is stable.
Additional sales in units = Increase in sales revenue / Sale price per unit:
- Additional units = $884,375 / $70.75 ≈ 12,500 units
Total units needed to break even:
- Total fixed costs = prior fixed costs + new fixed costs = $2,040,000 + $265,000 = $2,305,000
Break-even units including the new product:
- = $2,305,000 / $40 ≈ 57,625 units
So, to break even with the new product, approximately 57,625 units must be sold.
Sales Necessary to Maintain 2010 Operating Income with the New Product
2010 operating income was $1,160,000. To achieve the same profit with increased fixed costs and additional sales, the required units are:
- Total fixed costs = $2,305,000
- Desired profit = $1,160,000
- Total contribution margin needed = Fixed costs + Operating income target = $2,305,000 + $1,160,000 = $3,465,000
Units required:
- = $3,465,000 / $40 ≈ 86,625 units
This sales volume accounts for covering fixed costs and maintaining the same profit level.
Maximum Income from Operations with Expanded Product Line
The maximum operational income is achieved when sales are maximized or at a level where additional sales no longer generate incremental fixed costs. Given current data:
- Total sales revenue with the new product = $70.75 * 80,000 + $884,375 ≈ $5,660,000 + $884,375 = $6,544,375
- Total variable costs scale proportionally, but with fixed costs increasing by $265,000, the maximum profit can be approximated as:
Profit = (Total sales revenue - Total variable costs - Fixed costs)
= ($6,544,375 - 80,000 * $30.75 - ($2,040,000 + $265,000))
= ($6,544,375 - $2,460,000 - $2,305,000)
= $1,779,375
Thus, the maximum income possible from operations, considering sales at this level, is approximately $1,779,375.
Projected Income or Loss from Operations for 2011 if Proposal is Accepted
Assuming sales remain at 2010 levels and the proposal is accepted:
- Total sales revenue = $5,660,000 + $884,375 = $6,544,375
- Variable costs, unchanged per unit, escalate proportionally, but since units sold remain same, variable costs are:
- Variable COGS = $1,050,000
- Variable selling expenses = $1,050,000
- Variable administrative expenses = $360,000
Total variable costs = $2,460,000
- Fixed costs = $2,040,000 + $265,000 = $2,305,000
Net operating income:
- = Total contribution margin - Fixed costs
- = (Sales - Total variable costs) - Fixed costs
- = ($6,544,375 - $2,460,000) - $2,305,000 = $4,084,375 - $2,305,000 = $1,779,375
The net operating income would be about $1,779,375, a significant increase over 2010.
Recommendation and Conclusion
Based on the detailed analysis, accepting the proposal appears financially advantageous. The increased sales and operating income suggest that the new product can significantly contribute to profitability, especially considering the relatively modest fixed cost rise of $265,000 compared to the potential increase in operating income. The capacity to achieve a higher maximum income, coupled with maintaining or increasing sales levels, underscores the strategic benefit of expanding the product line. However, considerations such as market demand, production capacity, and operational risks should also inform the final decision.
References
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
Horngren, C. T., Sundem, G. L., Stratton, W. O., & Burgstahler, D. (2019). Introduction to Management Accounting (16th ed.). Pearson.
Weygandt, J., Kimmel, P. D., & Kieso, D. (2019). Financial & Managerial Accounting (11th Asia/Pacific ed.). Wiley.
Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
Hilton, R. W., & Platt, D. E. (2019). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
Anthony, R. N., & Govindarajan, V. (2018). Management Control Systems. McGraw-Hill Education.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson.
Drury, C. (2020). Cost and Management Accounting. Cengage Learning.
Langfield-Smith, K., Thorne, H., & Hilton, R. (2020). Management Accounting: Information for Managing and Creating Value. McGraw-Hill Education.
Berk, J., DeMarzo, P., & Harford, J. (2020). Fundamentals of Corporate Finance. Pearson.