Business Solutions Sells Upscale Modular Desk Units A 210839

Business Solutions Sells Upscale Modular Desk Units And Office Chairs

Business Solutions specializes in selling upscale modular desk units and office chairs, operating with a sales ratio of 3:2 (desk units to chairs). The sales prices are set at $1,250 for each desk unit and $500 for each chair. The variable costs incurred are $750 per desk unit and $250 per chair. The company faces fixed costs totaling $120,000. The assignment involves calculating the selling price per composite unit, the break-even point in dollar sales for 2011 and 2012, forecasting contribution margin income statements, and analyzing different sales and pricing strategies considering material cost reductions and potential price increases.

Paper For Above instruction

Business Solutions, a company specializing in upscale office furniture, offers a combination of modular desk units and office chairs that are sold in a specific ratio of 3:2. This ratio indicates that for every three desk units sold, two chairs are sold, reflecting their strategic product bundling aimed at maximizing revenue and meeting customer needs effectively. The firm's pricing strategy sets the sale prices at $1,250 per desk unit and $500 per chair, which are reflective of its upscale market positioning. The variable costs per unit are $750 for the desk units and $250 for the chairs, contributing to the company's contribution margins and overall profitability analysis. Fixed costs are maintained at $120,000 annually, covering expenses that do not fluctuate with production volume.

The initial task involves computing the selling price per composite unit, which combines both products into a single sales entity based on the sales ratio. A composite unit allows for analysis of overall profitability per transaction, providing insights into cost management and pricing effectiveness. The calculation involves weighted averages of selling prices considering the 3:2 ratio, which equals (3×$1,250 + 2×$500) divided by 5 units, resulting in a simplified per unit sales price. The computed selling price per composite unit helps in understanding the average revenue per combined sale, a critical metric for assessing overall sales performance and setting targets.

Next, the focus shifts to calculating the break-even point in dollar sales for the year 2011. This involves determining how much revenue needs to be generated to cover fixed costs when considering the contribution margin ratio derived from the sales price and variable costs. The contribution margin ratio is calculated as (Sales Price - Variable Costs) divided by Sales Price for each product, then combined according to the product ratio to reflect the composite unit. The break-even sales dollar amount for 2011 is derived by dividing total fixed costs by the overall contribution margin ratio, indicating the minimum sales revenue needed to avoid losses.

Forecasting for 2012 introduces the scenario where a new machine is installed, presumed to increase operational efficiency. Under this assumption, the break-even sales are projected based on unchanged unit sales prices and quantities, providing clarity on the financial implications of the investment. This forecasted break-even point assesses whether the expected output will be sufficient to recover costs and highlights potential profitability enhancements from the machine installation.

The subsequent task involves preparing a forecasted contribution margin income statement for 2012, assuming unit sales of 20,300 units and no change in unit sales price. The statement details total revenues, variable costs, contribution margin, fixed costs, and operating income, illustrating profitability under the new operational setup. It underscores how cost management and sales volume directly influence net income, assisting managers in strategic planning.

Further analysis calculates the sales levels required to achieve an after-tax income of $161,000 in 2012, considering a 30% income tax rate. The calculation accounts for pre-tax income necessary to deliver the desired after-tax profit, translating into sales revenue targets based on contribution margins. This helps in setting realistic sales commitments and evaluating whether operational changes or price adjustments are necessary to meet financial goals.

Following this, a detailed contribution margin income statement is prepared under the new sales level, demonstrating how potential sales volume changes and tax considerations impact profitability. By comparing the results at the sales level needed to attain the targeted after-tax income, managers can analyze strategic options for sales mix adjustments or pricing strategies.

The latter part of the task examines Cairo Company's sales and cost structures, focusing on cost reductions from new material and labor efficiencies, and analyzing two sales strategies: maintaining current prices and sales volume versus increasing prices with a reduction in sales volume. Calculations include break-even points for both strategies, considering the adjusted variable costs due to the new material and labor efficiencies, and the effect of different pricing approaches on profitability and capacity utilization.

Finally, the preparation of a forecasted contribution margin income statement allows comparison between the two plans, detailing sales, variable costs, contribution margin, fixed costs, operating profit before taxes, taxes, and net income for each scenario. This comprehensive analysis supports strategic decision-making regarding pricing, sales volume, and cost management under different operational adjustments, enabling management to select the most profitable course of action based on quantitative insights.

In conclusion, these financial analysis exercises provide valuable insights into how pricing strategies, cost reductions, operational efficiencies, and sales volume adjustments influence the overall profitability of Business Solutions and Cairo Company. By understanding the interplay between fixed costs, variable costs, sales prices, and tax considerations, management can make informed decisions that optimize revenues and control costs, ultimately fostering sustainable growth and competitiveness in the office furniture market.

References

• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial & Managerial Accounting (11th ed.). Wiley.