CVP Analysis; Strategy; Uncertainty Computer Graphics (CG) is a small manufacturer of electronic products for computers with graphics capabilities. The company has succeeded by being veryinnovative in product design. As a spin-off of a large electronics manufacturer (ElecTech), CG management has extensive experience in both marketing and manufacturing in the electronics industry.A long list of equity investors is betting that the firm will really take off because of the growth ofspecialized graphics software and the increased demand for computers with enhanced graphics capability. A number of market analysts say, however, that the market for the firm’s products is somewhatrisky, as it is for many high-tech start-ups, because of the number of new competitors entering themarket and CG’s unproven technology.[LO 9-1, 9-2, 9-3][LO 9-1, 9-2, 9-3, 9-5]Final PDF to printerblo17029_ch09_314-354.indd 351 02/19/18 09:08 AMChapter 9 Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis 351CG’s main product is a circuit board (CB3668) used in computers with enhanced graphics capabilities. Prices vary depending on the terms of sale and the size of the purchase; the average pricefor the CB3668 is $100. If the firm is sucessful, it might be able to raise prices, but it also mighthave to reduce the price because of increased competition. The firm expects to sell 150,000 units inthe coming year, and sales are expected to increase in the following years. The future for CG looksvery bright indeed, but the company is new and has not developed a strong financial base. Cash flowmanagement is a critical feature of the firm’s financial management, and top management must watchcash flow numbers closely.At present, CG is manufacturing the CB3668 in a plant leased from ElecTech using some equipment purchased from ElecTech. CG manufactures about 70 percent of the parts in this circuit board.CG management is considering a significant reengineering project to significantly change theplant and manufacturing process. The project’s objective is to increase the number of purchased parts(to about 55%) and to reduce the complexity of the manufacturing process. This would also permitCG to remove some leased equipment and to sell some of the most expensive equipment in the plant.The per-unit manufacturing costs for 150,000 units of CB3668 follow:CurrentManufacturing CostsProposedManufacturing CostsMaterials and purchased parts $ 6.00 $ 15.00Direct labor 12.50 13.75Variable overhead 25.00 30.00Fixed overhead 40.00 20.00Manufacturing information for CB3668:Number of setups 3,000 2,300Batch size 50 50Cost per setup $ 300 $ 300Machine hours 88,000 55,000General, selling, and administrative costs are $10 variable cost per unit and $1,250,000 fixed;these costs are not expected to differ for either the current or the proposed manufacturing plan.Required1. Compute the contribution margin per unit and the breakeven point in units for CB3668, both before andafter the proposed reengineering project. Assume all setup costs are included in fixed overhead.2. Determine the number of sales units at which CG would be indifferent as to the current manufacturingplan or the proposed plan.3. Use Goal Seek in Excel to confirm your answer to requirement 2.4. Briefly comment on CG’s strategy.5. Should CG undertake the proposed reengineering plan? Support your answer with sensitivity analysisand a discussion of short-term and long-term considerations.
CVP Analysis; Strategy; Uncertainty Computer Graphics (CG) is a small manufacturer of electronic products for computers with graphics capabilities. The company has succeeded by being very
innovative in product design. As a spin-off of a large electronics manufacturer (ElecTech), CG management has extensive experience in both marketing and manufacturing in the electronics industry.
A long list of equity investors is betting that the firm will really take off because of the growth of
specialized graphics software and the increased demand for computers with enhanced graphics capability. A number of market analysts say, however, that the market for the firm’s products is somewhat
risky, as it is for many high-tech start-ups, because of the number of new competitors entering the
market and CG’s unproven technology.
[LO 9-1, 9-2, 9-3]
[LO 9-1, 9-2, 9-3, 9-5]
Final PDF to printer
blo17029_ch09_314-354.indd 351 02/19/18 09:08 AM
Chapter 9 Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis 351
CG’s main product is a circuit board (CB3668) used in computers with enhanced graphics capabilities. Prices vary depending on the terms of sale and the size of the purchase; the average price
for the CB3668 is $100. If the firm is sucessful, it might be able to raise prices, but it also might
have to reduce the price because of increased competition. The firm expects to sell 150,000 units in
the coming year, and sales are expected to increase in the following years. The future for CG looks
very bright indeed, but the company is new and has not developed a strong financial base. Cash flow
management is a critical feature of the firm’s
cash flow numbers closely.
At present, CG is manufacturing the CB3668 in a plant leased from ElecTech using some equipment purchased from ElecTech. CG manufactures about 70 percent of the parts in this circuit board.
CG management is considering a significant reengineering project to significantly change the
plant and manufacturing process. The project’s objective is to increase the number of purchased parts
(to about 55%) and to reduce the complexity of the manufacturing process. This would also permit
CG to remove some leased equipment and to sell some of the most expensive equipment in the plant.
The per-unit
Current
Manufacturing Costs
Proposed
Manufacturing Costs
Materials and purchased parts $ 6.00 $ 15.00
Direct labor 12.50 13.75
Variable overhead 25.00 30.00
Fixed overhead 40.00 20.00
Manufacturing information for CB3668:
Number of setups 3,000 2,300
Batch size 50 50
Cost per setup $ 300 $ 300
Machine hours 88,000 55,000
General, selling, and administrative costs are $10 variable cost per unit and $1,250,000 fixed;
these costs are not expected to differ for either the current or the proposed manufacturing plan.
Required
1. Compute the contribution margin per unit and the breakeven point in units for CB3668, both before and
after the proposed reengineering project. Assume all setup costs are included in fixed overhead.
2. Determine the number of sales units at which CG would be indifferent as to the current manufacturing
plan or the proposed plan.
3. Use Goal Seek in Excel to confirm your answer to requirement 2.
4. Briefly comment on CG’s strategy.
5. Should CG undertake the proposed reengineering plan? Support your answer with sensitivity analysis
and a discussion of short-term and long-term considerations.
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