ACCOUNTING FOR DECISION MAKING BMAC5203 ASSIGNMENT SEMESTER 2014 -------- Prepared by: Nguy n Th Đông Quỳnh ễ ị Class: MBAOUM0314 – K13A ID Number: CGS00017295 OPEN UNIVERSITY MALAYSIA – HO CHI MINH CITY September 2014
CONTENTS TASK 1: CVP Analysis Success Company’s contribution format income statement for the most recent month is given below: 2
Sales (40,000 units) . . . . . . . . . . . . . . . . . . $800,000 Variable expenses . . . . . . . . . . . . . . . . . . . 560,000 Contribution margin . . . . . . . . . . . . . . . . . . 240,000 Fixed expenses . . . . . . . . . . . . . . . . . . . . . 192,000 Net operating income . . . . . . . . . . . . . . . . . $ 48,000 The industry in which Success Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits. a.i.1. New equipment has come on the market that would allow Frieden Company to automate a portion of its operations. Variable expenses would be reduced by $6 per unit. However, fixed expenses would increase to a total of $432,000 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased. Show an Amount column, a Per Unit column, and a Percent column on each statement. Do not show percentages for the fixed expenses. Based on the given data, after entering new equipment, new variable expenses would be determined as below: Variable expenses per unit = The income statements would be shown as follow: Present Proposed Amount Per unit % Amount Per unit % Sales $ 800,000 $ 20 100% $ 800,000 $ 20 100% Less: variable expenses $ 560,000 $ 14 70% $ 320,000 $ 8 40% Contribution margin $ 240,000 $ 6 30% $ 480,000 $ 12 60% Less: Fixed expenses $ 192,000 $ 432,000 Net operating income $ 48,000 $ 48,000 a.i.2. Refer to the income statements in (1) above. For both present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollars, and (c) the margin of safety in both dollar and percentage terms . (a) The degree of operating leverage: 3
For present operations: For proposed new operations: (b) The break-even point in dollars: For present operations: For proposed new operations: (c) The margin of safety in dollars: For present operations: For proposed new operations: The margin of safety in percentage: For present operations: For proposed new operations: a.i.3. Refer again to the data in (1) above. As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that ample funds are available to make the purchase.) As a manager, the main factor that a manager should consider is the fluctuation of the operation to the economy’s growth. So that the decision whether to purchase the new equipment or not affecting on the financial figure as well as the efficient operation of a firm. a.i.4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Instead of paying sales commissions, which are included in variable expenses, the marketing manager suggests that salespersons be paid fixed salaries and that the company 4
invest heavily in advertising. The marketing manager claims that this
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