June2017SupportPackage.pdf

# 3 calculate earnings before taxes sales 2528100 less

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3. Calculate earnings before taxes: Sales* \$2,528,100 Less material & labor 1,223,400 (1,348,400 – 125,000) Less overhead 375,000 (500,000 x .75) Contribution 929,700 Selling expense 250,000 Admin expense 180,000 Interest expense 30,000 Earnings before taxes \$ 469,700 * Vanilla \$53 x 10,200 540,600 Chocolate \$53 x 12,500 662,500 Caramel \$50 x 12,900 645,000 Raspberry \$50 x 13,600 680,000 4. The preferable pricing method for Kolobok is target costing as it is projected to significantly increase the return on sales from 7% to 18.5% (\$469,700 ÷ \$2,528,100) while maintaining the existing sales level. Target costing will also motivate management to improve internal processes to reduce costs to further improve profitability, particularly for any product where the proposed target price is lower than the previous price. This method will also force Kolobok to be continually aware of the actions of its competitors and trends in the marketplace in order to make adjustments when needed.

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423 Answer: Question 2.23 - Pursuit of Profit 1. The advantages of using the DuPont approach includes the following: It breaks down the overall rate of return into smaller pieces for analysis, It identifies constraints faced by the firm, It shows how separate policy decisions interact. 2. ROE = NI / Sales x Sales /Avg. Assets x Avg. Assets/Avg. Equity ROE Firm A = 17/120 x 120/273 x 273/73 = 23% ROE Firm B = 19/74 x 74/168 x 168/84 = 23% 3. a. Debt to Equity Ratio Firm A = 200/73 = 2.73 Debt to Equity Ratio Firm B = 84/84 = 1 b. Firm “A” uses a significant higher level of debt – more than twice as much as Firm “B”. This higher level of financial leverage increases the financial risk to equity holders of Firm B. 4. It may be appropriate for firms in mature industries and markets with little variance in period to period income, to employ higher levels of financial leverage. It would be more risky for firms that experience significant variance in income to employ leverage as the probability that income may be insufficient to service the debt burden becomes greater. Higher financial leverage is more appropriate for high-growth firms. 5. Since the “asset turnover” ratios are similar for both firms, and Firm “A” uses much more financial leverage than Firm “B”, it follows that Firm “B” must have a much higher “profit margin” than Firm “A”. Profit Margin Firm A = 17/120 = 14% Profit Margin Firm B = 19/74 = 26% 6. Limitations to ratio analysis include the following: Differences in accounting standards, such as IFRS/GAAP, LIFO/FIFO; Different currencies, or business environment; Different business sectors, firm organization.
424 Answer: Question 2.24 - Edmonds 1. a. Capital budgeting is the process of making long-run planning decisions for investments in projects. Edmonds has already identified the project, obtained information and prepared predictions. Edmonds should consider alternative projects for improving the distribution of products. With more than one project, Edmonds could compare the alternatives.

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