Must Show Work: Greenville Inc Makes Tabletop Two Burner Coo

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 the 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

The decline in sales of table-top two burner cookers at Grenville Inc. is a classic example of how changing consumer preferences and market conditions influence product demand and corporate profitability. As families transition toward more comprehensive kitchen appliances, companies like Grenville face critical decisions about pricing, cost management, and strategic investments. This paper conducts a comprehensive financial analysis based on the provided data, evaluates various strategic scenarios, and discusses their implications on the company's profitability and operational approach.

Analysis of Current Financial Situation

Grenville’s contribution margin (CM) ratio forms the foundation for understanding its profitability. Given sales of $900,000 and variable expenses of $675,000, the CM ratio can be calculated as:

  • CM Ratio = Contribution Margin / Sales = $225,000 / $900,000 = 0.25 (or 25%)

The break-even point in units is determined by dividing fixed expenses by the contribution margin per unit. The contribution margin per unit is sales price per unit minus variable expense per unit:

  • Unit selling price = $60
  • Variable expense per unit = $675,000 / 15,000 units = $45
  • Contribution margin per unit = $60 - $45 = $15

Therefore, the break-even units are:

  • Break-even units = Fixed costs / Contribution margin per unit = $245,000 / $15 ≈ 16,333 units

Correspondingly, the break-even sales dollar amount equals:

  • Break-even sales = Break-even units × Sales price per unit = 16,333 × $60 ≈ $980,000

Impact of Increased Advertising Budget on Operating Income

The company's president suggests increasing the advertising budget by $17,000 annually to boost quarterly sales by 1,000 units. The projected sales increase per year:

  • Additional units sold annually = 1,000 units/quarter × 4 quarters = 4,000 units

Additional contribution margin from increased sales:

  • Additional contribution = 4,000 units × $15 contribution per unit = $60,000

Since the extra advertising cost is $17,000 annually, the net increase in operating income is:

  • Incremental operating income = $60,000 - $17,000 = $43,000

Effects of Price Reduction and Advertising Increase

The sales manager proposes a 10% reduction in selling price:

  • New price per unit = $60 × 0.90 = $54

Voiding the original sales volume of 15,000 units, with a 50% increase in unit sales, results in:

  • New sales volume = 15,000 units × 1.50 = 22,500 units

Total sales revenue:

  • 22,500 units × $54 = $1,215,000

Variable expenses:

  • Variable expenses per unit = $45 (unchanged)
  • Total variable expenses = 22,500 × $45 = $1,012,500

Contribution margin:

  • Contribution per unit = $54 - $45 = $9
  • Total contribution = 22,500 × $9 = $202,500

Advertising budget increases by $10,000 annually:

  • New fixed costs = $245,000 + $10,000 = $255,000

The new contribution margin ratio:

  • With the new contribution margin per unit ($9), percentage = $9 / $54 ≈ 16.67%

Implementation of Product Design Changes

Introducing a new design increases variable costs by $2 per unit, raising the variable expense per unit to:

  • $45 + $2 = $47

To achieve a profit of $5,500, the required sales volume is calculated as:

  • Profit target = $5,500
  • Profit + Fixed expenses = Total contribution needed:
  • Total contribution = $5,500 + $245,000 = $250,500
  • Contribution per unit = $60 - $47 = $13
  • Required units = $250,500 / $13 ≈ 19,269 units

This high target emphasizes the importance of strategic sales volume increases or cost reductions.

Cost Reduction via Automation

Reducing variable costs by $3 per unit, the new variable expense per unit becomes:

  • $45 - $3 = $42

Increased fixed costs of $45,000 influence break-even calculations:

a. New CM ratio:

  • Contribution margin per unit = $60 - $42 = $18
  • CM ratio = $18 / $60 = 0.30 (30%)

b. New break-even units:

  • Break-even units = $245,000 / $18 ≈ 13,611 units

c. New break-even sales in dollars:

  • Break-even sales = 13,611 units × $60 = $816,666

d. Projected profit at 25,000 units:

  • Total contribution margin at 25,000 units = 25,000 × $18 = $450,000
  • Less fixed costs = $245,000 + $45,000 = $290,000
  • Operating income before taxes = $450,000 - $290,000 = $160,000
  • Tax (30%) = $48,000
  • Net income after tax = $112,000

Conclusion and Recommendations

The financial analysis indicates that strategic initiatives such as increased advertising, product redesign, and automation significantly influence profitability metrics. Automation, especially, enhances the contribution margin ratio, reduces the break-even point, and improves net profitability even under aggressive sales growth scenarios. Nonetheless, these strategies should be carefully balanced with market dynamics and operational risks. For Grenville Inc., sustained profitability in its declining market could depend on innovative product features, cost efficiencies, and targeted marketing campaigns.

References

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