Westboro Inc Makes Tabletop Two-Burner Cookers Used South
Westboro Inc Makes Table Top Two Burner Cookers Used South America A
Westboro Inc. manufactures table top two-burner cookers used in South America and Central America. The company's recent contribution format income statement shows declining sales due to consumer preferences shifting towards larger stoves with four burners and ovens. The given financial data includes sales of 15,000 units at $60 each, variable expenses totaling $675,000, contribution margin of $225,000, fixed expenses of $245,000, and a net operating loss of $20,000. The company seeks analysis on various operational strategies and financial outcomes to guide decision-making. This paper addresses specific calculations related to the contribution margin ratio, break-even points, potential impacts of marketing initiatives, cost adjustments, and sales projections.
Paper For Above instruction
The financial performance of Westboro Inc. reveals several critical insights essential for strategic decision-making. Key among these are the contribution margin ratio, break-even sales, and the effects of various operational adjustments. This comprehensive analysis evaluates these aspects while providing detailed calculations supported by the company's financial data.
Contribution Margin (CM) Ratio
The contribution margin ratio (CM ratio) is a crucial metric that indicates the percentage of each sales dollar that contributes to covering fixed expenses and generating profit after variable costs are deducted. It is calculated by dividing total contribution margin by total sales:
CM ratio = Contribution margin / Sales
Given data:
- Contribution margin = $225,000
- Sales = $900,000
Thus:
CM ratio = $225,000 / $900,000 = 0.25 or 25%
This implies that for every dollar of sales, $0.25 contributes toward fixed expenses and profit.
Break-Even Point in Units and Sales Dollars
The break-even point is where total revenues equal total expenses, resulting in zero net income. It is derived using the contribution margin per unit and the CM ratio.
First, compute the contribution margin per unit:
Contribution margin per unit = (Sales price per unit - Variable expense per unit)
Sales price per unit = $60
Variable expenses = $675,000 / 15,000 units = $45 per unit
Therefore:
Contribution margin per unit = $60 - $45 = $15
Next, determine the break-even point in units:
Break-even units = Fixed expenses / Contribution margin per unit
Break-even units = $245,000 / $15 ≈ 16,333 units
Now, compute the break-even sales in dollars:
Break-even sales dollars = Break-even units × Sales price per unit = 16,333 units × $60 ≈ $980,000
Impact of a $17,000 Advertising Increase and Sales Increase
The president suggests a $17,000 increase in annual advertising, leading to a quarterly sales increase of 1,000 units. To find the impact on annual operating income:
Additional units sold annually = 1,000 units/quarter × 4 quarters = 4,000 units
Additional contribution margin = Additional units × Contribution margin per unit = 4,000 × $15 = $60,000
Therefore, the net change in operating income after deducting the increased advertising expense:
Change in income = Additional contribution margin - Additional advertising expense
= $60,000 - $17,000 = $43,000
Thus, the company's operating income is projected to increase by $43,000 annually if the president's assumptions hold true.
Effects of Price Reduction and Advertising Increase
The sales manager proposes a 10% reduction in the selling price, combined with a $10,000 increase in advertising, expecting unit sales to rise by 50%. To analyze this scenario, new assumptions include:
- New selling price per unit = $60 × (1 - 0.10) = $54
- New units sold = 15,000 × 1.50 = 22,500 units
- Increase in advertising expense = $10,000 more annually
New contribution margin per unit needs to be recalculated considering variable costs are unchanged:
- Variable costs = $45 (unchanged)
- New selling price = $54
- Contribution margin per unit = $54 - $45 = $9
Total sales revenue = 22,500 units × $54 = $1,215,000
Total contribution margin = 22,500 × $9 = $202,500
Total fixed expenses = $245,000 + $10,000 = $255,000
Now, the projected net operating income:
Net operating income = Total contribution margin - Fixed expenses = $202,500 - $255,000 = -$52,500
This indicates a net loss, reflecting the lower contribution margin per unit despite increased sales volume.
Sales to Achieve Target Profit with Enhanced Design
Introducing a new stove top design with an additional variable cost of $2 per unit aims to increase sales. To find the required sales volume for a profit of $5,500:
Let x = required units to sell.
Contribution margin per unit = $15 - $2 = $13
Total contribution margin = x × $13
Total fixed expenses = $245,000 (assuming no change)
Profit goal = $5,500
Set up the equation:
x × $13 - $245,000 = $5,500
x × $13 = $250,500
x = $250,500 / $13 ≈ 19,269 units
Therefore, approximately 19,269 units need to be sold annually to attain the desired profit with the new design.
Impact of Automation on Variable Cost and Break-Even Analysis
Automation reduces variable costs by $3 per unit but increases fixed costs by $45,000 annually. Calculations are as follows:
New Contribution Margin Ratio
New variable cost per unit = $45 - $3 = $42
Contribution margin per unit = $60 - $42 = $18
Contribution margin ratio = $18 / $60 = 0.30 or 30%
New Break-Even Point in Units
Break-even units = Fixed costs / Contribution margin per unit = ($245,000 + $45,000) / $18 = $290,000 / $18 ≈ 16,111 units
New Break-Even Sales Dollars
Break-even sales dollars = 16,111 × $60 ≈ $966,667
Projected Sales and Income Statements for Next Year
Assuming sales of 25,000 units, two scenarios are evaluated: operating without automation and with automation.
Without Automation
- Total sales: 25,000 × $60 = $1,500,000
- Variable expenses: 25,000 × $45 = $1,125,000
- Contribution margin: $1,500,000 - $1,125,000 = $375,000
- Fixed expenses: $245,000
- Net operating income: $375,000 - $245,000 = $130,000
With Automation
- Sales revenue: 25,000 × $60 = $1,500,000
- Variable expenses: 25,000 × $42 = $1,050,000
- Contribution margin: $1,500,000 - $1,050,000 = $450,000
- Fixed expenses: $245,000 + $45,000 = $290,000
- Net operating income: $450,000 - $290,000 = $160,000
In both scenarios, the company faces tax implications at a 30% tax rate, affecting net income after taxes but not the gross operating figures.
Conclusion
The analysis indicates that Westboro Inc. can improve profitability through strategic marketing, cost management, and operational efficiency. The contribution margin ratio provides insight into sales leverage, while break-even points guide sales targets. Advertising and product design innovations can increase profitability, but must be balanced against costs. Automation shows potential for enhancing margins, although it requires upfront investment. Ultimately, data-driven decisions based on detailed financial analysis will help Westboro adapt to competitive market trends and consumer preferences effectively.
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