The corporation you work for has asked for a summary and report of the future projections for the next 5 years. With the help of your CFO, you have put together the following preliminary budget figures based on last year’s numbers for a planned production and sales level of 4,000 units per year:
Building depreciation
$200,000/yr.
Machine operators
$100,000/yr.
Management staff
$400,000/yr.
Direct materials
$4,000,000/yr.
Other expenses that seem to vary based on production levels
$3,000,000/yr.
Other expenses that don’t seem to vary
$1,300,000/yr.
Selling price per unit
$5,000/unit
Utilities:
This category is difficult to analyze; a part of it is related to the building’s heat and light, whereas a part of it is used in the manufacturing process itself. You have the following data to which you will apply the high–low method:
When there is no production, utility costs are $20,000/month
When production levels reached 4,000 units/month, utility costs totaled $40,000/month
You are planning for the future and working on a report based on data from last year’s actual performance. You are going to calculate various figures, including the contribution margin per unit, contribution margin ratio, breakeven level in dollars, and breakeven level in units to answer some important questions regarding your data.
Using only the data from last year’s actual performance, create an Excel report that answers the questions below, showing all calculations. After completing your Excel computations, in Microsoft Word, write a professional memo to the executive committee analyzing the calculations from your report. Within the memo, give your opinion based upon the numbers as to whether production seems to be budgeted properly, and whether the corporation can make an adequate profit above breakeven levels. Explain your rationale, and include answers to the following:
Which of these 8 cost categories would be considered variable, and which fixed? Explain why.
Which costs would be considered mixed (e.g., semi-variable or semi-fixed)?
Ignoring utility costs altogether, compute the contribution margin per unit, in dollars and in percentage, and the breakeven level of sales.
Ignoring utility costs altogether, if instead of breaking even, the firm wants to make $10,000/month profit, answer the following:
How many units must be sold each month?
To how many sales dollars is this unit volume equivalent?
In year 2, the CEO plans to add $300,000/yr. expenses in added administrative salaried headcount. Ignoring utility costs altogether, how many additional units must be sold just to pay for this added expense?
