ACC 601: Managerial Accounting Group

Part 1: CVP Analysis
Eag le Co mp any makes the MusicFind er, a so p histicated satellite rad io . Eag le has exp erienc ed a stead y g ro wth in sales f o r the p ast f ive years. Ho wever, Ms. Luray, Eag le’s CEO, b elieves that to maintain th e co mp any’ s p resent g ro wth will req uire an ag g ressive ad vertising camp aig n next year. To p rep are f o r th e camp aig n, the co mp any’ s acco untant, Mr. Bed narik, has p rep ared and p resented to Ms. Luray the f o llo wing d ata f o r the curren t year, Year 1:

Variab le co sts:

Direct lab o r (p er unit) $ 82 Direct materials (p er unit) 37 Variab le o verhead (p er unit) 15

unit)

To tal variab le co sts (p er

$ 134

Fixed co sts (annu al): Manuf act u ring $ 400,000 Selling 297,000 Ad ministrativ e 795,000

To tal f ixed co sts (annual ) $ 1,492,0 0 0

Selling p rice (p er unit) 411

Exp ected sales revenu es , Year 1

(22,00 0 units) $ 9,042,00 0

Eag le has an inco me tax rate o f 35 p ercent.

Ms. Luray has set the sales targ et f o r Year 2 at a level o f $10,686 , 0 0 0 (o r 26,000 rad io s).

Require d : (a) What is the p ro jected af ter-ta x o p erating p ro f it f o r Year 1?

(b)Wh a t is the b reak-ev e n in units and d o llars f o r Year 1?

(c) Ms. Luray b elieves that to attain the sales targ et (26,00 0 rad io s) will req uire ad d itio nal selling exp e n s e s o f $287,0 0 0 f o r ad vertising in Year 2, with all o ther co sts remaining co nstant. What will b e the af ter-t a x o p erating p ro f it f o r Year 2 if the f irm sp end s the ad d itio nal $287,00 0 ?

(d)Wh a t will b e the b reak-ev en p o int in sales d o llars f o r Year 2 if the f irm sp end s the ad d itio nal $287,0 0 0 f o r ad vertising ?

(e) If the f irm sp end s the ad d itio nal $287,0 0 0 f o r ad vertising in Year 2, what is the sales level in d o llars req uired to eq ual the Year 1 af ter-tax o p erating p ro f it?

(f) At a sales level o f 26,000 units, what is the maximu m amo unt the f irm can sp end o n ad vertising to earn an af ter-t ax o p erating p ro f it o f $757,0 0 0?

Part 4: Estimated Net Realizable Value and Effects of Processing Further (30 points)

Fletcher Fab ricatio n, Inc., p ro d uces three p ro d ucts b y a jo int p ro d uctio n p ro cess. Raw materi als are p ut into p ro d uctio n in Dep artm e nt X, and at the end o f p ro cessing in this d ep artm en t, three p ro d ucts ap p ear. Pro d uct A is so ld at the sp lit-o f f p o int with no f urther p ro cessing . Pro d ucts B and C req uire f urther p ro cessing b ef o re they are so ld . Pro d uct B is p ro cessed in Dep art m en t Y, and p ro d uct C is p ro cessed in Dep artm e n t Z. The co mp any uses the estimated net realizab le value metho d o f allo cating jo int p ro d uctio n co sts. Fo llo wing is a summa ry o f co sts and o ther d ata f o r the q uarte r end ed June 30.

No invento ries were o n hand at the b eg inning o f the q uarter. No raw material was o n hand at June 30.

All units o n hand at the end o f the q uarter were f ully co mp lete as to p ro cessing .

Pro d ucts A B C

Po und s so ld 22,000 59,000 65,000 Po und s o n hand at June 30 48,000 0 36,000 Sales revenu es $17,600 $73,75 0 $117,00 0

Dep artm e n ts X Y Z Raw material co st $55,000 $ 0 $ 0 Direct lab o r co st 26,000 37,750 95,900 Manuf act u ring o verhead 10,000 12,450 39,775

Require d : (a) Determi n e the f o llo wing amo unts f o r each p ro d uct.

(1) Estimated net realizab le value used f o r allo cating jo int co sts.

(2) Jo int co sts allo cated to each o f the three p ro d ucts.

(3) Co st o f g o o d s so ld .

(4) Finished g o o d s invento ry co sts, June 30.

(b)Assu me that the entire o utp ut o f p ro d uct A co uld b e p ro cessed f urther at an ad d itio nal co st o f $1.75

p er p o und and then so ld f o r $5.10 p er p o und . Co mp ute the increme nt al inco me f ro m f urther p ro cessing A.

(c) Co nsid ering the results o f p art b , sho uld the co mp any p ro cess p ro d uct A f urther? Exp lain.