High Country Inc Produces And Sells Recreational Products

High Country Inc Produces And Sells Many Recreational Products

High Country, Inc., produces and sells recreational products, including a new folding camp cot. The company operates a new plant and has provided cost and revenue data for May, its first month of operation. The data includes production and sales figures, selling price, selling and administrative expenses, manufacturing costs, and fixed costs. The company seeks to assess the profitability of the camp cot during this period, using both absorption and variable costing methods. The tasks involve calculating unit product costs, preparing income statements under each costing method, and analyzing profitability metrics such as contribution margin, break-even points, and operating leverage.

Additional analyses pertain to Northwood Company's manufacturing and sales of basketballs, including calculations of contribution margin ratio, break-even in units, effects of variable cost changes, pricing strategies, and impact of new manufacturing plants with altered cost structures. These analyses include incremental calculations for sales increases and price adjustments, as well as comparisons of different scenarios to determine their effects on profitability. Similar evaluations are required for Topper Sports, Inc., which produces tennis rackets with varying sales mixes, fixed costs, and sales volumes. The tasks encompass preparing contribution income statements for different months, computing break-even sales, and analyzing how changes in sales of specific products influence net operating income.

Sample Paper For Above instruction

Introduction

Understanding the interplay of manufacturing costs, sales revenues, and operational expenses is fundamental for assessing the profitability of new products and manufacturing decisions. High Country, Inc. and Northwood Company provide an ideal context to explore how different costing methods, sales strategies, and operational changes influence financial outcomes. This paper analyzes their data to determine cost per unit, profitability under various scenarios, and strategic implications for pricing, production, and sales volume.

High Country, Inc.: Costing and Profitability Analysis

The primary task involves calculating unit product costs using both absorption and variable costing for May. Under absorption costing, all manufacturing costs—including fixed and variable overheads—are allocated to units. The per-unit manufacturing cost comprises direct materials ($14), direct labor ($8), variable manufacturing overhead ($3), and a share of fixed manufacturing overhead. Fixed manufacturing overhead per unit is calculated by dividing total fixed overhead ($836,000) by units produced (44,000), resulting in approximately $19.00. Therefore, the total unit cost under absorption costing is $14 + $8 + $3 + $19 = $44.

The income statement under absorption costing begins with the sales revenue ($84 x 39,000 units = $3,276,000), subtracts cost of goods sold (units sold x unit cost, i.e., 39,000 x $44 = $1,716,000), and then deducts selling and administrative expenses, both variable ($3 per unit x 39,000 = $117,000) and fixed ($559,000). The resulting net income illustrates the effect of absorption costing on profitability reporting.

Variable costing diverges by only considering variable manufacturing costs in the product cost, which include direct materials, direct labor, and variable manufacturing overhead, summing to $14 + $8 + $3 = $25. Fixed manufacturing overhead is treated as a period expense. The contribution margin per unit ($84 - $25 = $59) underpins a contribution format income statement, highlighting how sales cover variable costs and contribute towards fixed expenses, ultimately determining net income.

Comparing the two methods illuminates their differences in profit recognition and the importance of understanding fixed costs in decision-making. The analysis demonstrates that absorption costing may defer some fixed manufacturing overhead into inventory, influencing gross profit figures, while variable costing provides clearer insight into contribution margins and operational break-even points.

Northwood Company’s Sales and Cost Analysis

Northwood’s basketball sales data reveals the impact of variable expenses, selling price, and fixed costs on overall profitability. The calculation of the contribution margin ratio ((Selling price - variable expenses) / selling price) shows the percentage of each sales dollar contributing to covering fixed costs and profit. For last year, this ratio is ($25 - $15) / $25 = 0.40 or 40%. The break-even point in units is fixed expenses divided by the contribution margin per unit ($375,000 / $10 = 37,500 balls).

The degree of operating leverage at last year's sales level indicates the sensitivity of net income to changes in sales volume and is calculated as contribution margin divided by net operating income ($600,000 / $225,000 ≈ 2.67). An increase in variable expenses by $3 per ball reduces the contribution margin per unit from $10 to $7, thereby lowering the contribution margin ratio to ($25 - $18) / $25 = 0.28 or 28%, and increasing the break-even point to fixed costs divided by the new contribution margin ($375,000 / $7 ≈ 53,571 balls).

Projected sales to maintain last year's net income under increased variable costs are determined by adjusting sales volume to compensate for reduced contribution margin per unit. The formula involves solving for sales volume where total contribution margin covers fixed expenses and desired net income, leading to a higher required sales volume.

Pricing strategies to maintain contribution margins involve calculating the new selling price needed to sustain the previous contribution margin ratio if wages and variable costs rise. This typically involves increasing the price proportionally or through targeted adjustments to offset increased costs.

Analysis of alternative manufacturing scenarios, like building a new plant, involves re-calculating per-unit costs, contribution margins, and break-even points under revised cost structures. A new plant that reduces variable costs by 40% but doubles fixed costs alters the cost dynamics significantly, affecting profitability thresholds and sales requirements to attain targeted income levels.

Topper Sports: Sales Mix and Break-Even Analysis

Topper Sports manufactures three tennis rackets with distinct prices, variable costs, and fixed costs. Contribution margin per racket varies, impacting overall profitability. The contribution margin for each product is the difference between selling price and variable expenses: Standard ($65 - $39 - $3.25 = $22.75), Deluxe ($100 - $42 - $5 = $53), and Pro ($145 - $58 - $7.25 = $79.75). The contribution margin ratios are calculated by dividing contribution margins by sales price, indicating the proportion of sales contributing to fixed costs and profit.

The contribution income statements for April and May reflect sales volumes, variable expenses, and gross margins, adjusted for sales mix changes. The fixed costs, which include fixed production costs, advertising, and administrative salaries, are deducted to determine net operating income. Changes in sales mix, such as increased sales of one racket type, impact the overall contribution margin and profitability.

The break-even point in dollar sales is found by dividing total fixed costs by the weighted average contribution margin ratio, considering sales mix proportions. This calculation helps determine the sales volume necessary to cover all fixed costs at current product line profitability levels.

Incremental analysis provides insights into how increased sales of specific rackets affect overall net income. For example, a $23,000 increase in sales of the Standard racket, which has a lower contribution margin per unit compared to Pro, results in a different impact on net income than a similar increase in Pro racket sales. The analysis involves calculating the incremental contribution margin generated per dollar increase in sales of each product and assessing the effects on profitability.

Conclusion

The comprehensive analysis underscores the significance of choosing an appropriate costing method, setting optimal sales prices, and managing product mixes to enhance profitability. Companies like High Country, Northwood, and Topper Sports must evaluate how fixed and variable costs, sales strategies, and operational changes influence financial outcomes. Employing contribution margin analysis, break-even computations, and sensitivity analyses enables managerial decision-making that aligns with strategic goals, operational efficiency, and market competitiveness. Such analytic approaches are vital for navigating complex market dynamics and ensuring sustainable profitability in manufacturing and sales endeavors.

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