ACCT 621 Group Case Study Liquid Fuel Company ✓ Solved
ACCT 621: Group Case Study LIQUID FUEL COMPANY Liquid Fuel
Liquid Fuel Company produces specialty water bottles and sells them to retailers who sell them directly to consumers. The water bottles are high-quality bottles produced for outdoor activities such as camping. In December 2019, Jackson Triggs, the president of the company, was considering an alternative marketing plan for 2020 that was presented to her by Stephanie Terril, the marketing manager. Based on sales from January through December 2019, Jackson expected that 2020 sales would amount to 300,000 units. The alternative marketing plan details a strategy to cut the selling price to retailers to $7.50 and boost sales volume by 18 percent to 348,100 units in 2020.
Using the information provided, the assignment requires analyzing the following:
- Prepare a CVP Income Statement for 2019 and determine the Company’s contribution margin ratio and break-even point.
- Prepare a CVP Income Statement for 2020 under the new marketing plan and determine the contribution margin ratio and break-even point.
- Determine the number of bottles needed to achieve a profit of $150,000 in 2020.
- Analyze the incremental net income or loss from accepting a special government contract.
- Prepare a memo to management discussing whether to accept or reject the government contract with explanations.
Paper For Above Instructions
The Liquid Fuel Company (LFC) operates in a specialized niche, producing high-quality water bottles aimed at outdoor enthusiasts. Understanding the financial implications of various operational decisions is crucial for LFC’s leadership to ensure profitability and sustainable growth. This paper will provide a detailed analysis of the necessary financial statements, ratio calculations, and strategic recommendations based on 2019 and 2020 projections.
1. CVP Income Statement for 2019
The Contribution Margin (CM) is a crucial metric for evaluating the profitability of a company. The CVP Income Statement for 2019, considering the sales of 295,000 units, is outlined below.
CVP Income Statement for LFC (2019)
| Particulars | Total ($) | Per Unit ($) |
|---|---|---|
| Sales Revenue (295,000 units @ $8.00) | 2,360,000 | 8.00 |
| Less: Variable Costs | ||
| Direct Materials (295,000 @ $0.85) | 250,750 | 0.85 |
| Direct Labor (14,750 hours @ $9.75) | 144,812.5 | 0.49 |
| Packaging (295,000 @ $0.70) | 206,500 | 0.70 |
| Variable Mfg Overhead (295,000 @ $1.45) | 427,750 | 1.45 |
| Total Variable Costs | 1,029,812.5 | 3.49 |
| Contribution Margin | 1,330,187.5 | 4.5 |
| Less: Fixed Costs | ||
| Fixed Manufacturing Overhead | 550,000 | |
| Fixed Selling & Admin Expenses | 450,000 | |
| Total Fixed Costs | 1,000,000 | |
| Net Income | 330,187.5 |
The contribution margin for 2019 can be calculated as follows:
Contribution Margin Ratio = (Sales Revenue - Total Variable Costs) / Sales Revenue = (2,360,000 - 1,029,812.5) / 2,360,000 = 0.563 or 56.3 %.
Break-even Point Calculation for 2019
To calculate the break-even point in units:
Break-even Point = Total Fixed Costs / Contribution Margin per Unit = 1,000,000 / 4.5 = 222,222 units.
2. CVP Income Statement for 2020 (with the Marketing Plan)
Assuming the changes from the marketing plan are enacted, we expect an 18% increase in sales volume, leading to the sale of 348,100 units in 2020.
CVP Income Statement for LFC (2020)
| Particulars | Total ($) | Per Unit ($) |
|---|---|---|
| Sales Revenue (348,100 units @ $7.50) | 2,606,600 | 7.50 |
| Less: Variable Costs | ||
| Direct Materials (348,100 @ $0.85) | 296,885 | 0.85 |
| Direct Labor (17,405 hours @ $9.75) | 169,352.5 | 0.49 |
| Packaging (348,100 @ $0.70) | 243,670 | 0.70 |
| Variable Mfg Overhead (348,100 @ $1.45) | 505,745 | 1.45 |
| Total Variable Costs | 1,215,652.5 | 3.49 |
| Contribution Margin | 1,390,947.5 | 4.01 |
| Less: Fixed Costs | ||
| Fixed Manufacturing Overhead | 600,000 | |
| Advertising and Promotion | 184,600 | |
| Total Fixed Costs | 784,600 | |
| Net Income | 606,347.5 |
The contribution margin for 2020 is calculated as follows:
Contribution Margin Ratio = (Sales Revenue - Total Variable Costs) / Sales Revenue = (2,606,600 - 1,215,652.5) / 2,606,600 = 0.5305 or 53.05%.
Break-even Point Calculation for 2020
To calculate the break-even point in units for 2020:
Break-even Point = Total Fixed Costs / Contribution Margin per Unit = 784,600 / 4.01 = 195,274 units.
3. Required Sales to Achieve Profit of $150,000 in 2020
The required sales can be calculated as follows:
Required Sales Volume = (Total Fixed Costs + Target Profit) / Contribution Margin per Unit
Required Sales Volume = (784,600 + 150,000) / 4.01 = 232,036 units.
4. Incremental Analysis of Government Contract
The government has requested 150,000 bottles at $4.25 each. Since they would avoid packaging and variable selling costs, we analyze the acceptance of this special order.
Incremental Revenue and Costs
Incremental Revenue = 150,000 units x $4.25 = $637,500.
Incremental Costs: Including only variable costs (materials, labor, manufacturing overhead) for producing these bottles.
Direct Material = 150,000 x $0.85 = $127,500.
Direct Labor = (7,500 hours @ $9.75) = $73,125.
Variable Manufacturing Overhead = 150,000 x $1.45 = $217,500.
Total Variable Costs = $418,125.
Incremental Income = Incremental Revenue - Total Variable Costs = 637,500 - 418,125 = $219,375.
5. Memo to Management
To: Management
From: [Your Name]
Date: [Today’s Date]
Subject: Recommendation on Government Contract
Upon reviewing the financial implications and operational capacities regarding the potential government contract for 150,000 bottles, I advise accepting the contract. This decision contributes positively to the company’s income through an additional profit of $219,375, while also utilizing excess capacity effectively. Considering our limitations on fixed costs and existing profit margins, this order is aligned with our growth strategy.
Qualitative considerations suggest enhanced visibility and potential long-term governmental partnerships can foster future sales avenues. Balanced against the fixed manufacturing overhead implications resulting from renting a new machine, the overall benefits outweigh the costs. Hence, it is prudent to proceed with acceptance of the government contract while ensuring to maintain our current production efficiency and quality standards.
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