48288796-Solutions-to-Week-3-Practice-Text-Exercises

# 48288796-Solutions-to-Week-3-Practice-Text-Exercises - 2-48...

This preview shows pages 1–3. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 2-48 CVP and Financial Statements for a Mega-Brand CompanyProcter & Gamble Company is a Cincinnati-based company that produces household products underbrand names such as Gillette, Bounty, Crest, Folgers, and Tide. The company’s 2006 income statement showed the following (in millions):Net sales \$68,222Costs of products sold 33,125Selling, general, and administrative expense 21,848Operating income \$13,249Suppose that the cost of products sold is the only variable cost; selling, general, and administrativeexpenses are fixed with respect to sales.Assume that Procter & Gamble had a 10% increase in sales in 2007 and that there was no changein costs except for increases associated with the higher volume of sales. Compute the predicted 2007operating income for Procter & Gamble and its percentage increase. Explain why the percentageincrease in income differs from the percentage increase in sales.2-48Amounts are in millions (rounded with slight rounding errors).Net sales (1.10 x \$68,222)\$75,044Variable costs:Cost of goods sold (1.10 x \$33,125)36,438Contribution margin38,606Fixed costs:Selling, administrative, and general expenses21,848Operating income\$16,758The percentage increase in operating income would be (\$16,758 ÷\$13,249) - 1 = .26 or 26%, compared with a 10% increase in sales. The contribution margin would increase by 10% or .10 x (\$68,222 - \$33,125) = \$3,510 million. Because fixed costs would not change (assuming the new volume is within the relevant range), operating income would also increase by \$3,510 million, from \$13,249 million to \$16,759 million. If all costs had been variable, costs would have increased by an additional .10 x \$21,848 = \$2,185 million, making operating income \$16,758 - \$2,185 = \$14,573 million, a 10% increase over the 2006 operating income of \$13,249 million. Because of the existence of fixed costs, the percentage increase in operating income will exceed the percentage increase in sales.2-61 CVP in a Modern Manufacturing EnvironmentA division of Hewlett-Packard Company changed its production operations from one where alarge labor force assembled electronic components to an automated production facility dominatedby computer-controlled robots. The change was necessary because of fierce competitive pressures.Improvements in quality, reliability, and flexibility of production schedules were necessary just tomatch the competition. As a result of the change, variable costs fell and fixed costs increased, asshown in the following assumed budgets:Old Production Operation New Production OperationUnit variable costMaterial \$ .88 \$ .88Labor 1.22 .22Total per unit \$ 2.10 \$ 1.10Monthly fixed costsRent and depreciation \$450,000 \$ 875,000Supervisory labor 80,000 175,000Other 50,000 90,000Total per month\$580,000 \$1,140,000Expected volume is 600,000 units per month, with each unit selling for \$3.10. Capacity is 800,000Expected volume is 600,000 units per month, with each unit selling for \$3....
View Full Document

{[ snackBarMessage ]}

### Page1 / 5

48288796-Solutions-to-Week-3-Practice-Text-Exercises - 2-48...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online