Accounting Principles - Case Study Example

Running head: Accounting Principles Name: University: Course: Tutor: Date of submission: Table of Contents Table of Contents 2 a)What is the projected operating income for 2005 3 b)What is the contribution margin per unit for 2005? 4 c. What is the break-even point in units for 2005 ? 5 What will the Dollar sales for 2006 6 Operating Income required to equal 2005 7 Projected Operating income is described as the amount of profit which the company will realize from a business’s operations after subtracting operating expenses such as cost of goods sold, wages among others and depreciation. In normal cases the operating expenses are usually costs which the company incurs from various operating activities including things such as office supplies and heat and power (Crosson & Needles, 78). Usually, the operating expenses are categorized in three types thus fixed, variable and reserve for replacement. A business’s operating income therefore indicates how expensive it is to maintain business operations and produce certain amount of profit. Projected operating income is used to gauge the operation of a company both for small and large companies (Crosson & Needles, 78). Calculated as: Operating Income=Gross Income-Operating Expenses-Depreciation In relation to the case study a)What is the projected operating income for 2005 Projected Operating income= Projected Gross Income – Projected Operating Expenses Projected Gross Income= Number of flashlight sales expected in 2005 x selling price per Flashlight Projected Gross Income = 20,000x $25.00=$ 500,000 Projected Operating Expenses in the year 2005= Total variable costs+ Total fixed costs Total Variable costs= Total Variable costs per flight x Number of flashlight sales Expected in 2005 Total Variable costs = $ 15.00 x20, 000=$ 300,000 Total fixed costs=Manufacturing + Selling+ Administrative costs Total fixed costs = $ 25,000+$ 40,000+$ 70,000= $ 135,000 Projected Operating Expenses in the year 2005==$ 300,000+$ 135,000=$ 435,000 Projected Operating income (2005)= Projected Gross Income – Projected Operating Expenses Projected Operating income for 2005 =$ 500,000-=$ 435,000=$ 65,000 Projected Operating income for B.T. Hens Company for the year 2005 =$ 65,000 b)What is the contribution margin per unit for 2005? Unit contribution popularly known as contribution margin per unit shows a company how profitable each unit is. Contribution margin is calculated as follows: Unit Contribution Margin (C) = Unit Revenue (Price, P)- Unit Variable Cost (V): C = P − V USP - UVC = UCM In relation to the case study contribution margin per unit for 2005 for B.T. Hens Company will be calculated as follows; Selling price per flashlight= $25.00 Total Variable costs= Total Variable costs per flight x Number of flashlight sales Expected in 2005 = $ 15.00 x20, 000=$ 300,000 Per unit variable cost=total variable costs =$ 300,000 =$ 15 Total number of flashlights 20,0000 =$ 15 per unit variable costs. Unit Contribution Margin (C) = Unit Revenue (Price, P) - Unit Variable Cost (V): SPU - VCU Hence contribution margin per unit for B.T. Hens Company for the year 2005 will be =$25.00-$ 15=$10 c. What is the break-even point in units for 2005 ? Break even point shows specific period of time at which a company shows neither profit nor loss. Usually its normally calculated as ; There two methods of calculating Break even point in units thus; (BEP) in Units = TFC / (SPU - VCU) or (BEP) in Units= Total fixed costs (TFC) Contribution Margin per Unit (SPU – VCU) Using the second method of calculating break even point therefore the Break even point in units for B.T. Hens Company for the year 2005 will be calculated as follows; = Fixed expenses / Unit contribution margin where Total fixed costs=Manufacturing + Selling+ Administrative costs = $ 25,000+$ 40,000+$ 70,000= $ 135,000 Unit contribution margin =$10 Therefore Break even point will be BEP in units = $ 135,000 = 13,500 $10 Therefore; Break even point in units for B.T. Hens Company for the year 2005= 13,500 units d) The manager believes that to attain the sales target in the year 2006, the company must incur an additional selling expense of $10000 for advertising in 2006, with all other costs remaining constant . What will be the break-even point in dollar sales for 2006 if the company spends the additional $10000 What will the Dollar sales for 2006 Break even point in dollar sales for 2006 will be calculated as follows; Breakeven point in total sales dollars= fixed expenses/ Contribution Margin ratio But contribution margin ratio=(Contribution Margin / Sales) × 100 Contribution Margin is an accounting concept which allows a particular company to determine the profitability of individual products(Crosson & Needles,78). In this case Contribution Margin will be calculated as follows; Contribution Margin=Total revenues- Total variable costs Total revenues for year 2006 will be calculated as follows; Total revenues= Number of flashlight sales expected in 2006 x selling price per Flashlight =22000x$25=$550,000 Total Variable costs= Total Variable costs per flight x Number of flashlight sales Expected in 2006 = $ 15.00 x22, 000=$ 330,000 Therefore contribution margin will be calculated as follows; Contribution Margin= Total revenues- Total variable costs =$550,000-$ 330,000=$220,000 Contribution margin ratio=(Contribution Margin / Sales) × 100 Therefore this will be calculated as follows=$220,000x 100 = 40% 550,000 Therefore breakeven point in total sales dollars will be calculated as follows; Breakeven point in total sales dollars= fixed expenses/ Contribution Margin ratio Total Fixed expenses= Manufacturing + Selling+ Administrative costs Computed as follows; = $ 25,000+$ 40,000(plus additional $10000 for advertising in 2006) +$ 70,000 Total fixed costs will be =$145,000 Hence Breakeven point in total sales dollars= fixed expenses/ Contribution Margin ratio =$145,000= $362,500 0.40 Breakeven point in total sales dollars for B.T. Hens Company for the year 2006=$362,500 e)If the company spends the additional $10000 for advertising in 2006, what is the sales level in dollars required to equal 2005 operating income Operating Income required to equal 2005 Total operating income in 2005 Projected Operating income for 2005 =$ 500,000-=$ 435,000=$ 65,000 In order to gauge the level of sales in dollars required to equal 2005 operating income it will be necessary to calculate the operating income for 2006 which will be calculated as follows; Projected Operating income for the year 2006 = Projected Gross Income for the year 2006 – Projected Operating Expenses for the year 2006 Projected Gross Income for the year 2006= Number of flashlight sales expected in 2006 x selling price per Flashlight Projected Gross Income for the year 2006 =22000x$25=$550,000 Projected Operating Expenses for the year 2006= Total variable costs+ Total fixed costs Where ; Total variable costs= Total Variable costs per flight x Number of flashlight sales Expected in 2006 Total variable costs = $ 15.00 x22, 000=$ 330,000 Total fixed costs=$ 25,000+$ 40,000(plus additional $10000 for advertising in 2006) +$ 70,000=$ 145,000 Projected expenses=330,000+$ 145,000=$475,000 Projected Operating income for 2006= Projected Gross Income for the year 2006 – Projected Operating Expenses for the year 2006 Which will be as follows; Projected Operating income for 2006=$550,000-$475,000=$75,000 If 22,000 flashlight= $75000 with additional 10,000 costs on advertising On other hand 20,000 flashlight= $ 65,000 without 10,000 additional 10000 costs on advertising Therefore the number of flashlights sales which will be equivalent to 2005 projected operating income of $ 65,000 will be calculated as follows; If 22,000=$75000 It implies that the projected flashlight should be less than 22,000 Let’s try 21,700 flashlights With 21,700 the projected operating income will be calculated as follows Total gross income=21,700x25= 542,500- expenses 542,500-475,000=$67,500 Let’s try 21,600 flashlights With 21,600 flashlights the projected operating income will be calculated as follows; Total gross income = 21,600x25=$540,000- total projected expenses $540,000-$475,000= $65,000 This therefore implies that B.T. Hens Company will be required to put its sales level at $540,000 if the company wants to achieve the 2005 operating income of $65,000 References Crosson, Susan V & Needles, Belverd E .Managerial Accounting.9th ed. New York:Cengage Learning, 2010,pp.78 - Read More