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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....
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- Spring '09
- Income Statement