ACCT 201 Lecture Notes - Lecture 9: Income Statement, Weighted Arithmetic Mean
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BW Manufacturing Company produced gas grills in three primarymodels (Grills A, B, and C). BW was a small player in the industry,but business had been good, and it was expecting another profitableyear. Draft of the companyâs operating budget is shown in Exhibit1. Stand costs for the three products are explained in Exhibit 3.Selling, general, and administrative (SG&A), other costs,interest income, and interest expense were likely to remain thesame no matter which product-line combinations the companyproduced.
Before calling it a day, the two owners asked their assistant,Justine Richardson, to determine the impact of several options onincome before tax. They agreed to meet the following day, andRichardson hurried off to look at what these latest ideas wouldmean. She had four questions to address and was asked to considereach option independent of all other options.
BW Manufacturing Company
1.Calculate the impact of dropping Grill A. Assume no otherchanges to the plan.
Should BW drop Grill A? The owners wanted to know the impact ofdropping Grill A from their line of products. Richardson was toldto assume that the volumes and selling prices of the other twoproducts would be the same whether or not the Grill A product linewas dropped.
Your response:
2.Calculate the impact of reducing Grill C price to $75, withthe expectation that the volume of that product will increase to220,000 units. Assume no other changes to the plan.
Your response:
3. Calculate the impact of a 10,000 unit decrease in Grill A and10,000 unit increase in Grill C volume due to the change in theadvertising focus. Assume no other changes to the plan.
Should BW change its advertising focus?
Your response:
4. Calculate the impact of a $5 decrease in Grill Câs price anda change in advertising focus leading to a 10,000 unit decrease inGrill Aâs volume and a 30,000 unit increase in Grill Câs volume.Assume no other changes to the plan.
Should BW lower the price of Grill C and change its advertisingfocus?
Your response:
| Table 1. Actual2009 volumes | |||||||||
| Grill | Volume (# in units) | ||||||||
| A | 115,000 | ||||||||
| B | 110,000 | ||||||||
| C | 225,000 | ||||||||
| Richardson began to wonder ifthe bottom line was as high as it should have been | |||||||||
| Exhibit 1 | |||||||||
| BW Manufacturing Company | |||||||||
| Operating Budget 2009: Draft12/18/2008 | |||||||||
| Sales | $41,200,000 | ||||||||
| Less: costs of products sold | $22,800,000 | ||||||||
| Gross margin | $18,400,000 | ||||||||
| SG&A | $9,350,000 | ||||||||
| Other costs | $2,100,000 | ||||||||
| Operating income | $6,950,000 | ||||||||
| Less: Interest expense | $420,000 | ||||||||
| Plus: Interest income | $150,000 | ||||||||
| Income before tax | $6,680,000 | ||||||||
| Income taxes | $2,338,000 | ||||||||
| Net income | $4,342,000 | ||||||||
| Exhibit 2 | |||||||||
| Standard Costs | |||||||||
| Grill A | Grill B | Grill C | |||||||
| Planned Volume (units) | 80,000 | 120,000 | 200,000 | ||||||
| Per Unit: | |||||||||
| Sales price | $150 | $110 | $80 | ||||||
| Direct Costs: | |||||||||
| Materials | 17 | 10 | 7 | directly related to production volume | |||||
| Labor | 21 | 16 | 4 | directly related to production volume | |||||
| Subtotal | $38 | $26 | $11 | ||||||
| Indirect costs: | |||||||||
| Supplies | 7 | 2 | 1 | directly related to production volume | |||||
| Labor | 10 | 8 | 4 | one-half varies with direct labor; the rest isfixed | |||||
| Supervision | 8 | 3 | 1 | unrelated to production volume | |||||
| Energy | 12 | 6 | 4 | one-half varies with direct labor; the rest isfixed | |||||
| Depreciation | 22 | 7 | 5 | unrelated to production volume | |||||
| Head office support | 12 | 6 | 3 | corporate office allocation* | |||||
| All other | 11 | 2 | 1 | unrelated to production volume | |||||
| Subtotal | $82 | $34 | $19 | ||||||
| Total product cost | $120 | $60 | $30 | ||||||
| Product-line profitability | $30 | $50 | $50 | ||||||
| *This category comprisesaccounting, IT, human resources, legal, and other supporting theproduction of these products. | |||||||||
| Allocations were made usingmultiple drivers. Corporate office budgets are unrelated toproduction levels. | |||||||||
| Exhibit 3 | |||||||||
| 2009 Operating Results: Draft1/19/2010 | |||||||||
| Revenue | $46,225,000 | ||||||||
| Variable costs: | |||||||||
| Materials | 4,800,000 | ||||||||
| Direct labor | 5,200,000 | ||||||||
| Supplies | 1,300,000 | ||||||||
| Indirect labor | 1,500,000 | ||||||||
| Energy | 1,600,000 | ||||||||
| Total variable cost | $14,400,000 | ||||||||
| Fixed costs: | |||||||||
| Indirect labor | 1,300,000 | ||||||||
| Supervision | 1,200,000 | ||||||||
| Energy | 1,350,000 | ||||||||
| Depreciation | 3,660,000 | ||||||||
| Head office | 2,300,000 | ||||||||
| All other | 1,380,000 | ||||||||
| Total fixed cost | $11,190,000 | ||||||||
| Total cost | $25,590,000 | ||||||||
| Gross margin | $20,635,000 | ||||||||
| SG&A | 9,350,000 | ||||||||
| Other costs | 2,100,000 | ||||||||
| Operating income | $9,185,000 | ||||||||
| Less: interest expense | 420,000 | ||||||||
| Plus: interest income | 150,000 | ||||||||
| Income before tax | $8,915,000 | ||||||||
| Income taxes | $3,120,250 | ||||||||
| Net income | $5,794,750 | ||||||||
