Must Show Work: Greenville Inc. Makes Tabletop Two-Burner Co

Must Show Workgrenville Inc Makes Table Top Two Burner Cookers Used

Must Show Workgrenville Inc Makes Table Top Two Burner Cookers Used in the Caribbean and South America. Recently, sales have been declining as more families can now afford regular size stoves complete with four burners and an oven. The company’s contribution format income statement for the most recent year is given below: Sales (15,000 units x $60) $900,000 Variable expenses 675,000 Contribution margin 225,000 Fixed expenses 245,000 Net operating income (loss) (20,000) Required: (Round to the nearest $ as needed) 1. Compute the company’s CM ratio, the company’s break-even point in units, and the company’s break-even point in sales dollars 2. The president of the company believes a $17,000 increase in the annual advertising budget will result in an increase in quarterly sales of 1,000 units. If the president is right what will be change in annual operating income? 3. Refer back to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of only $10,000 in the advertising budget, will cause unit sales to increase by 50%. Prepare the new contribution format income statement assuming these changes were adopted. 4. Refer back to the original data. The Marketing Department thinks that a fancy design on the stove top would increase sales. The only cost associated with the new design would be variable cost of $2.00 per unit. Assuming no other changes, how many units would have to be sold each year to earn a profit of $5,500? 5. Refer back to the original data. By automating certain operations, the company could reduce variable costs by $3 per unit. However, fixed costs would increase annually by $45,000. a. Compute the new CM ratio b. Compute the new break-even point in units c. Compute the new break-even point in sales dollars d. Assume the company expects to sell 25,000 units next year. Prepare two contribution margin format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.) The company is in the 30% tax bracket.

Paper For Above instruction

Introduction

The decline in sales for Grenville Inc., a producer of tabletop two-burner cookers in the Caribbean and South America, prompts an analysis of its financial data to determine key metrics and assess strategic options aimed at improving profitability. This paper conducts a comprehensive financial analysis using contribution margin approaches, break-even calculations, and projections based on various hypothetical changes including advertising budgets, pricing strategies, product design modifications, and automation. The goal is to inform management decision-making with precise quantitative insights.

Part 1: Contribution Margin Ratio and Break-even Point

The contribution margin (CM) ratio is crucial for understanding the percentage of sales that contributes to covering fixed costs and generating profit. It is calculated by dividing the contribution margin by sales revenue:

\[ \text{CM ratio} = \frac{\text{Contribution Margin}}{\text{Sales}} \]

Given data: Sales = $900,000 and Contribution Margin = $225,000,

\[ \text{CM ratio} = \frac{225,000}{900,000} = 0.25 \]

Thus, 25% of sales revenue contributes to fixed costs and profit.

The break-even point in units is calculated as:

\[ \text{Break-even units} = \frac{\text{Fixed Expenses}}{\text{Contribution margin per unit}} \]

Contribution margin per unit = Sales price per unit – Variable cost per unit. Since total contribution margin is $225,000 for 15,000 units,

\[ \text{Contribution margin per unit} = \frac{225,000}{15,000} = \$15 \]

Given fixed expenses are $245,000,

\[ \text{Break-even units} = \frac{245,000}{15} \approx 16,333 \text{ units} \]

Sales dollars at break-even point:

\[ \text{Break-even sales} = \text{break-even units} \times \text{Selling price per unit} = 16,333 \times 60 \approx \$980,000 \]

Summary:

- Contribution Margin Ratio = 25%

- Break-even units ≈ 16,333 units

- Break-even sales dollars ≈ $980,000

Part 2: Impact of Increased Advertising Budget on Operating Income

The president's plan involves a $17,000 increase in annual advertising expenses, expected to boost quarterly sales by 1,000 units.

Annual increase in units:

\[ 4 \times 1,000 = 4,000 \text{ units} \]

Additional contribution margin from increased sales:

\[ 4,000 \text{ units} \times \$15 = \$60,000 \]

Increase in expenses:

\[ \$17,000 \]

Net change in operating income:

\[ \text{Increase in contribution margin} - \text{Additional expenses} = 60,000 - 17,000 = \$43,000 \]

Conclusion:

The projected annual operating income would increase by approximately $43,000 if the assumptions hold.

Part 3: Effects of a 10% Price Reduction and Advertising Increase

The sales manager's proposal involves lowering selling price by 10%, increasing advertising by $10,000, and expecting a 50% increase in unit sales.

New selling price per unit:

\[ 60 \times 0.9 = \$54 \]

New sales volume:

\[ 15,000 \times 1.5 = 22,500 \text{ units} \]

Variable expenses per unit remain at:

\[ \text{Variable expenses per unit} = \frac{675,000}{15,000} = \$45 \]

Total sales revenue:

\[ 22,500 \times 54 = \$1,215,000 \]

Total variable expenses:

\[ 22,500 \times 45 = \$1,012,500 \]

Contribution margin:

\[ 1,215,000 - 1,012,500 = \$202,500 \]

Less fixed expenses (assumed unchanged at $245,000):

Net operating income:

\[ 202,500 - 245,000 = -\$42,500 \]

Adding the increased advertising expense:

\[ -42,500 - 10,000 = -\$52,500 \]

Summary:

This scenario results in an estimated net operating loss of $52,500, indicating the pricing and sales increase may not be beneficial under current conditions.

Part 4: Breakeven with a New Design and Additional Cost

Introducing a new design adds a variable cost of $2 per unit, with no other changes. The target profit:

\[ \$5,500 \]

The contribution margin per unit:

\[ \text{Original contribution margin} = \$15 \]

\[ \text{New contribution margin} = 60 - ( \text{Variable cost} + 2 ) \]

But since variable cost is not specified beyond the production cost structure, assume original variable costs of $45 per unit (from previous calculations), so:

\[ \text{New variable cost} = 45 + 2 =\$47 \]

Contribution margin per unit:

\[ 60 - 47 = \$13 \]

Total units needed:

\[ \text{Units} = \frac{\text{Fixed costs} + \text{Target profit}}{\text{Contribution margin per unit}} \]

Fixed costs are $245,000,

\[ \text{Units} = \frac{245,000 + 5,500}{13} \approx \frac{250,500}{13} \approx 19,27 \text{ units} \]

Therefore, about 19,300 units need to be sold annually to reach the profit goal.

Part 5: Impact of Automation on Costs and Profitability

Automation promises to reduce variable costs by $3 per unit but increases fixed costs by $45,000 annually.

a. New contribution margin ratio:

Original contribution margin per unit:

\[ \$15 \]

New contribution margin per unit:

\[ 60 - (45 - 3) = 60 - 42 = \$18 \]

Old CM ratio:

\[ 0.25 \]

New CM ratio:

\[ \frac{18}{60} = 0.3 \]

b. New break-even point in units:

\[ \text{Break-even units} = \frac{\text{Fixed costs} + \text{Additional fixed costs}}{\text{Contribution margin per unit}} \]

Updated fixed costs:

\[ 245,000 + 45,000 = \$290,000 \]

\[ \text{Break-even units} = \frac{290,000}{18} \approx 16,111 \text{ units} \]

c. New break-even sales dollars:

\[ 16,111 \times 60 \approx \$966,660 \]

d. Sales forecast of 25,000 units:

Non-automated scenario:

Total contribution margin:

\[ 25,000 \times 15 = 375,000 \]

Net operating income:

\[ 375,000 - 245,000 = 130,000 \]

Automated scenario:

Total contribution margin:

\[ 25,000 \times 18 = 450,000 \]

Net operating income:

\[ 450,000 - 290,000 = 160,000 \]

Accounting for taxes at 30%:

- Non-automated net income after tax:

\[ 130,000 \times (1 - 0.3) = 91,000 \]

- Automated net income after tax:

\[ 160,000 \times (1 - 0.3) = 112,000 \]

Conclusion:

Automation increases net operating income before tax by $30,000, and after tax by approximately $21,000, enhancing profitability significantly.

Conclusion

Our analysis reveals that Grenville Inc. is operating below its break-even point at current sales levels, with a contribution margin ratio of 25%. Increasing advertising can positively influence sales, but pricing strategies require caution, as a substantial reduction in price may lead to a net loss. Technological advancements through automation present promising improvements in cost efficiency and profitability, elevating the contribution margin ratio from 25% to 30% and reducing the break-even point. Strategic focus on automation and targeted marketing, coupled with cautious pricing strategies, can help Grenville Inc. reverse its declining sales trend and achieve sustainable profitability.

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