🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
Accounting
1
answer
0
watching
116
views

Concepts: Variable cost Fixed cost Total cost Average total cost Marginal cost

Total revenue Average revenue Marginal revenue Demand Curve

1. Mark Sampson, President of Sampson Switch Company must consider the pricing and production for the Ultra Switch Model B, one of the company’s top selling models. Switch production includes grinding and assembly of finished components. Marketing efforts consist primarily of print ads in trade publications. Last year the Model B produced a profit of $8,000.

Production facts. Sampson hires part time workers on an “as needed” basis to do the grinding task. On average, a grinder is paid $8.00 per hour and s/he is expected to produce 200 switch plates per each 8-hour day. Switch assemblers, also part-time workers, are paid $50 per day and they are expected to assemble 5 switches per hour. Each switch consists of two switch plates and assorted other components (the cost of the “other components” is $3.11 per switch).

Fixed Costs. Other costs include the year-long contract for the rental of the assembly line equipment ($1,000 per month).

Marketing facts. According to next year’s plan, Mark expects to place 10 black and white print ads (each $500) and two special feature, color ads (each $2,500) for the Model B. Salaries for the marketing sales force that are allocated to the Model B will total $18,000 next year.

1a. What is the cost to produce one switch? (i.e., the unit variable cost)?

1b. What and how much are the items composing the total “fixed” costs for next year?

1c. Graph the relationship between quantity produced (on the X-axis) and Total Cost (on the Y-axis).

1d. How much is the per-unit contribution if the product is priced at $15 a unit?

1e. What was the profit last year? What will be the change in profitability for the Model B if the product is priced at $15 per unit and 2,500 units are sold?

1f. What is the breakeven point if the product is priced at $15? How many must be sold next year in order to produce the same profit level as last year?

1g. Assume that Mark has $50,000 in equity invested in the Model B line. How many units must be sold in order to return 25% on his equity?

2. Answer qs 1a-g assuming that the selling price is reduced to $10 and demand increases by a factor of four.

3. After much investigation, the marketing research department tells Mark that they expect the “demand curve” to be. Compare the expected demand with the breakeven point for each price point. Knowing this information, what price should Mark charge in order to maximize profits on the Model B ?

selling price units demanded break even point
$15

2,500

 ...
$10 10,000 ...
$9 13,000 ....
$8 14,000 .....
$7 15,000 .....

4a. Create a graph showing “Quantity Demanded” on the X-axis and “Total Revenue $” on the Y-axis for each of the five price–quantity demanded points listed in q 3 above.

4b. Create a graph that superimposes the Total Revenue for the five points of the “Demand Curve” on the “Breakeven” Chart of the Model B (note the $$ Y -axis will represent Total Revenue for the Demand curve and will represent Total Cost for the Breakeven chart). { 01.81 gif k&b785 g pees ]

Watch
1
answer
0
watching
116
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Beverley Smith
Beverley SmithLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

Business Description

You will assume the role of an entrepreneur to start a smallcompany. Your company will rent a retail cart inside the Mall ofAmerica to imprint T-shirts with exclusive original designs by afamous artist who has agreed to design these T-shirt pictures foryou each year at a special discount. Your target customers areaffluent teenagers and young adults. Your business is scheduled tolaunch on January 1, 2017.

Cost information:

Mall of America charges you $2,750 rent per month, whichincludes utilities, cleaning, and maintenance.

You will order white, cotton T-shirts from a T-shirt wholesaler.Each T-shirt costs $2.00 to purchase (cost includes taxes,shipping, and handling).

You agreed to pay the artist a $3,000 annual contract fee fortwelve T-shirt designs. This same term is renewable for the next 3years. Each T-shirt picture will only be used for one year.Therefore, in the second year, 12 new pictures will be designed foranother $3,000 annual contract fee.

Equipment that will be required to be acquired at the start ofbusiness includes a computer, printer, and direct to garmentprinter. Total cost will be $25,000. The equipment is expected tolast 5 years without salvage value. Straight-line method ofdepreciation should be used.

Production cost per shirt is $5.20 (ink, etc.)

Bags for shirts cost $0.10 each.

Students are hired as part-time workers. On average it takes onelabor hour to print 10 shirts. Each worker is paid $10 perhour.

Sales personnel are required 80 hours per week and are paid $10per hour.

Business insurance is purchased at a cost of $2,000 peryear.

Advertising costs are expected to be $12,000 per year.

Requirements:

1. Name your company (5 points)

2. What and how much are the variable costs? Present each itemin cost per T-shirt basis (5 points).

3. What and how much are the fixed costs? Present each item intotal cost per year (5 points).

4. Write out the annual cost formula in Y = a + bX format (5points).

5. Calculate the total amount of cash that will be needed at thestart of the business in order to buy all necessary equipment andmachines, purchase sufficient materials and supplies for 1,000shirts, and cover the first three months of fixed expenses. Thisamount will be your initial investment in the business. Note thatthe equipment will be paid in full on the first day of business aswell as the first annual payment to the artist. Other expenses willbe paid on a monthly basis (10 points).

6. Develop a price using a target price (what are similarT-shirts selling for) (5 points).

7. Develop a price using cost-based pricing and what you wouldlike to see as a return on your business (i.e. 10%, 15%, 25%) (5points).

8. Calculate contribution margin per T-shirt and contributionmargin ratio based on the price you decided upon (either the pricefrom item 6 or 7 above) (5 points).

9. Based on the price you decided upon, calculate how manyT-shirts need to be sold in order to break-even. Calculate how muchsales in dollars are needed to break-even (10 points).

10. Prepare a cost/volume/profit chart (10 points).

11. Based on the estimated sales level of 12,000 T-shirts forthe first year, prepare the company’s forecasted functional incomestatement for the year ended on 12/31/2017 (10 points).

12. If sales could increase by 10% (to 13,200 T-shirts), by howmuch in dollars would net operating income increase? By whatpercentage would net operating income increase? (5 points)

13. Prepare a contribution format income statement assuming asales increase of 10%. Compare your new net operating income withyour answer in 11 (10 points).

14. Calculate how many T-shirts need to be sold in order to makea $25,000 target profit for the year (5 points).

15. Based on the assumption that the number of shirts calculatedin item 14 are made and sold during the first year of business,calculate the margin of safety and the operating leverage for thebusiness. What do these figures tell you about how risky thebusiness is? (10 points)

16. Prepare a cash budget for the company’s first year ofoperations based on the sales calculated in item 14. Assume allsales are cash sales and that all costs and expenses are paid incash. The initial cash balance is the amount calculated in #5. Youdecide to maintain a minimum cash balance of $10,000 at December31, 2017 (15 points).

17. Calculate the first year’s estimated return on equity basedon the sales calculated in item 14 (note that beginning equity willequal the initial investment in the business calculated in #5). (5points).

18. After reviewing the budgeted income statement and theestimated return on equity for the first year of operations,consider business strategies that will help to improveprofitability. Describe your strategies clearly and justify why youbelieve the strategies will work. Provide the variable cost perT-shirt, total fixed cost, selling price per T-shirt, andcontribution margin per T-shirt under your new strategies. Providethe new cost formula. What is the new break even? (15 points).

19. After your thorough analyses of costs, sales, andprofitability of your T-shirt business throughout this project,what is your overall impression of the future potential of thebusiness? Provide a short assessment (10 points).

*** 1-5 completed below***

Variable Costs:
Purchase cost per T-shirt $2.00
Labor $1.00
Production Cost $5.20
Bags for Shirts $0.10
Total variable cost perT-shirt $8.30
Fixed Costs:
Rent ( $ 2,750 x 12) $33,000.00
Annual fees of artist $3,000.00
Depreciation expense $5,000.00
Salaries of sales peronnel (80 x 52 x $ 10) $41,600.00
Business Insurance $2,000.00
Advertising Costs $12,000.00
Total fixed expenses $96,600.00
Annual Cost Formula: Y=96,000 +8.3x
Equipment $25,000.00
Supplies $7,300.00
Contract $3,000.00
Fixed Expenses $23,400.00
Investment $58,700.00

Please answer all questions (2-19). Thank you!

Business Description

You will assume the role of an entrepreneur to start a smallcompany. Your company will rent a retail cart inside the Mall ofAmerica to imprint T-shirts with exclusive original designs by afamous artist who has agreed to design these T-shirt pictures foryou each year at a special discount. Your target customers areaffluent teenagers and young adults. Your business is scheduled tolaunch on January 1, 2017.

Cost information:

1 Mall of America charges you $2,750 rent per month, which includesutilities, cleaning, and maintenance.

2 You will order white, cotton T-shirts from a T-shirt wholesaler.Each T-shirt costs $2.00 to purchase (cost includes taxes,shipping, and handling).

3 You agreed to pay the artist a $3,000 annual contract fee fortwelve T-shirt designs. This same term is renewable for the next 3years. Each T-shirt picture will only be used for one year.Therefore, in the second year, 12 new pictures will be designed foranother $3,000 annual contract fee.

4 Equipment that will be required to be acquired at the start ofbusiness includes a computer, printer, and direct to garmentprinter. Total cost will be $25,000. The equipment is expected tolast 5 years without salvage value. Straight-line method ofdepreciation should be used.

5 Production cost per shirt is $5.20 (ink, etc.)

6 Bags for shirts cost $0.10 each.

7 Students are hired as part-time workers. On average it takes onelabor hour to print 10 shirts. Each worker is paid $10 perhour.

8 Sales personnel are required 80 hours per week and are paid $10 perhour.

9 Business insurance is purchased at a cost of $2,000 per year.

10 Advertising costs are expected to be $12,000 per year.

Requirements:

2 What and how much are the variable costs? Present each item in costper T-shirt basis (5 points).

3 What and how much are the fixed costs? Present each item in totalcost per year (5 points).

4 Write out the annual cost formula in Y = a + bX format (5points).

5 Calculate the total amount of cash that will be needed at the startof the business in order to buy all necessary equipment andmachines, purchase sufficient materials and supplies for 1,000shirts, and cover the first three months of fixed expenses. Thisamount will be your initial investment in the business. Note thatthe equipment will be paid in full on the first day of business aswell as the first annual payment to the artist. Other expenses willbe paid on a monthly basis (10 points).

6 Develop a price using a target price (what are similar T-shirtsselling for) (5 points).

7 Develop a price using cost-based pricing and what you would like tosee as a return on your business (i.e. 10%, 15%, 25%) (5points).

8 Calculate contribution margin per T-shirt and contribution marginratio based on the price you decided upon (either the price fromitem 6 or 7 above) (5 points).

9 Based on the price you decided upon, calculate how many T-shirtsneed to be sold in order to break-even. Calculate how much sales indollars are needed to break-even (10 points).

10 Prepare a cost/volume/profit chart (10 points).

11 Based on the estimated sales level of 12,000 T-shirts for the firstyear, prepare the company’s forecasted functional income statementfor the year ended on 12/31/2017 (10 points).

12 If sales could increase by 10% (to 13,200 T-shirts), by how much indollars would net operating income increase? By what percentagewould net operating income increase? (5 points)

13 Prepare a contribution format income statement assuming a salesincrease of 10%. Compare your new net operating income with youranswer in 11 (10 points).

14 Calculate how many T-shirts need to be sold in order to make a$25,000 target profit for the year (5 points).

15 Based on the assumption that the number of shirts calculated initem 14 are made and sold during the first year of business,calculate the margin of safety and the operating leverage for thebusiness. What do these figures tell you about how risky thebusiness is? (10 points)

16 Prepare a cash budget for the company’s first year of operationsbased on the sales calculated in item 14. Assume all sales are cashsales and that all costs and expenses are paid in cash. The initialcash balance is the amount calculated in #5. You decide to maintaina minimum cash balance of $10,000 at December 31, 2017 (15points).

17 Calculate the first year’s estimated return on equity based on thesales calculated in item 14 (note that beginning equity will equalthe initial investment in the business calculated in #5). (5points).

18 After reviewing the budgeted income statement and the estimatedreturn on equity for the first year of operations, considerbusiness strategies that will help to improve profitability.Describe your strategies clearly and justify why you believe thestrategies will work. Provide the variable cost per T-shirt, totalfixed cost, selling price per T-shirt, and contribution margin perT-shirt under your new strategies. Provide the new cost formula.What is the new break even? (15 points).

19 After your thorough analyses of costs, sales, and profitability ofyour T-shirt business throughout this project, what is your overallimpression of the future potential of the business? Provide a shortassessment (10 points).

Weekly leaderboard

Home
Homework Help 3,900,000
Accounting 580,000
Start filling in the gaps now
Log in