Assume that Company A and Company B sell a microwave popcorn popper for $20. Although the companies have different cost structures, both companies currently show a profit of $21,000 based on sales of 14,000 units as shown in the following financial statements for the month of June. Both companies hold no inventory and sell contractual orders in the month. For the Month of June Company A Company B Sales ($20) $280,000 $280,000 Variable cost of goods sold ($5.00, 7.50, Company A and B, respectively) 70,000 105,000 Variable selling and administrative costs ($2.00, $4.00, Company A and B, respectively) 28,000 56,000 Contribution margin 182,000 119,000 Fixed cost of goods sold 105,000 70,000 Fixed selling and administrative costs 56,000 28,000 Profits Before-Tax $21,000 $21,000 For each company, determine the impact on monthly profit using differential analysis for each of the following separate scenarios. 1. Sales volume decreases to 11,200 units for the month for both companies. 2. Both companies drop the selling price per unit to $18.50 which results in unit sales of 12,600 units for the month. 3. Both companies drop the selling price per unit to $18.50 which results in unit sales of 12,600 units for the month. In addition, both companies decrease the quality of materials used which drops variable cost of goods sold by $0.20 per unit. Both companies eliminate a part-time administrative position reducing fixed costs by $3,500 per month. 4. Are the companies profitable in June after cost cutting measures are considered and by how much?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Concept explainers

Question

Applying Differential Analysis to Profitability Scenarios

Assume that Company A and Company B sell a microwave popcorn popper for $20. Although the companies have different cost structures, both companies currently show a profit of $21,000 based on sales of 14,000 units as shown in the following financial statements for the month of June. Both companies hold no inventory and sell contractual orders in the month.

For the Month of June	Company A	Company B
Sales ($20)	$280,000	$280,000
Variable cost of goods sold ($5.00, 7.50, Company A and B, respectively)	70,000	105,000
Variable selling and administrative costs ($2.00, $4.00, Company A and B, respectively)	28,000	56,000
Contribution margin	182,000	119,000
Fixed cost of goods sold	105,000	70,000
Fixed selling and administrative costs	56,000	28,000
Profits Before-Tax	$21,000	$21,000

For each company, determine the impact on monthly profit using differential analysis for each of the following separate scenarios.
1. Sales volume decreases to 11,200 units for the month for both companies.
2. Both companies drop the selling price per unit to $18.50 which results in unit sales of 12,600 units for the month.
3. Both companies drop the selling price per unit to $18.50 which results in unit sales of 12,600 units for the month. In addition, both companies decrease the quality of materials used which drops variable cost of goods sold by $0.20 per unit. Both companies eliminate a part-time administrative position reducing fixed costs by $3,500 per month.
4. Are the companies profitable in June after cost cutting measures are considered and by how much?

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 6 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions