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Discussion+3+key - A202 Spring 2010 Discussion 3 In this...

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A202 Spring 2010 Discussion 3 In this handout, you will: Explore the cost-volume-profit relation Calculate operating risk for a particular situation Use the CVP relation to make decisions Part I. The Cost-Volume-Profit Relationship; Planning for Profit Bottini Inc. produces fine leather dress shoes for women that are hand-sewn and embellished with ostrich skin. The company has assembled the following information for the shoes for October: Leather and other materials $19.00 per pair Direct labor $26.00 per pair Variable overhead $5.50 per pair Fixed overhead $96,000 per month Variable selling $ 4.50 per pair sold Fixed selling $52,000 per month Fixed administrative $154,500 per month Current production volume 6,000 per month Pairs sold (October) 5,800 pairs Selling price $110 October profit before taxes $16,500 a. What is the breakeven point in units (i.e. pairs), and in sales revenue? b. Suppose the company wanted to earn $27,500 profit before taxes. How many pairs of shoes would they need to sell next month? c. Refer back to the original information above. What is the firm’s margin of safety? What is the firm’s operating leverage? d. Comment on how the information in part c) might be useful to the business.
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Part I I. Using the Cost-Volume-Profit Relation to Make Decisions Sales levels were strong when the shoes were first introduced, and peaked at 6,500 pairs. More recently, sales volume has fallen off; it now averages about 5,800 pairs per month, but shows signs of dropping further. This summer the company received negative publicity when they were the target of attack ads by PETA (People for the Ethical Treatment of Animals) and other animal rights groups (since they use calfskin and ostrich skin in their shoes). In addition, as the population ages, many women are moving to lower heels. In order to combat the falling sales, managers at Bottini are considering several possible changes, as described below. Evaluate each of the ideas below independently; include the impact the changes will have on profits, and any other considerations that might be important. After evaluating the options, make a recommendation. You may propose a combination of actions, if you see merit in that approach.
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