Goats Head Soup Company manufactures high quality speakers for desktop and laptop computers. Last month Goats Head Soup suffered a loss of $18,000. The income statement for the last month is as follows: Sales (13,500 units x $40) Less variable expenses (13,500 units x $28) $540,000 378,000 Contribution margin Less fixed expenses 162,000 (180,000) Net operating loss (18,000) Required: 1. Compute the break-even point and contribution margin ratio (CM ratio) of Goats Head Soup Company? 2. Sales department feels that if monthly advertising budget is increased by $16,000, the sales will be increased by 3,5000 units. Show the effect of these changes assuming the selling price remains unchanged. 3. If sales price is reduced by 20% and monthly advertising expenses are increased by $70,000, the unit sales are expected to increase by 100%. Show the effect of this change by preparing a new income statement of Goats Head Soup Company. 4. The Goats Head Soup wants to make the packing of its product more attractive. The new packing would increase cost by $1.20 per unit. Assuming no other changes, compute the number of units to be sold to earn a net operating income of $9,000. 5. The company is planning to purchase a new machine. The installation of new machine will increase fixed cost by $236,000 and decrease unit variable expenses by 50% (a). Compute the CM ratio and break-even point if the new machine is installed (b). Company expects a sale of 20,000 units for the next month. Prepare two income statement, one assuming that the machine is not installed and one assuming that it is installed. (c) Should the company install new machine? Give your recommendations.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Compute the break-even point and contribution marginratio (CM ratio) of Goats Head Soup Company?
Sales department feels that if monthly advertising budget is increased by $16,000, the sales will be increased by 3,500 units. Show the effect of these changes assuming the selling price remains unchanged.
If sales price is reduced by 20% and monthly advertising expenses are increased by $70,000, the unit sales are expected to increase by 100%. Show the effect of this change by preparing a new income statementof Goats Head Soup Company.
The Goats Head Soup wants to make the packing of its product more attractive. The new packing would increase cost by $1.20 per unit. Assuming no other changes, compute the number of units to be sold to earn a net operating income of $9,000.
The company is planning to purchase a new machine. The installation of new machine will increase fixed cost by $236,000 and decrease unit variable expenses by 50%.
(a). Compute the CM ratio and break-even point if the new machine is installed.
(b). Company expects a sale of 20,000 units for the next month. Prepare two income statement, one assuming that the machine is not installed and one assuming that it is installed.
(c) Should the company install new machine? Give your recommendations.

Goats Head Soup Company manufactures high quality speakers for desktop and laptop
computers. Last month Goats Head Soup suffered a loss of $18,000. The income
statement for the last month is as follows:
Sales (13,500 units x $40)
Less variable expenses (13,500 units x $28)
$540,000
378,000
Contribution margin
Less fixed expenses
162,000
(180,000)
Net operating loss
(18,000)
Required:
1. Compute the break-even point and contribution margin ratio (CM ratio) of Goats
Head Soup Company?
2. Sales department feels that if monthly advertising budget is increased by $16,000,
the sales will be increased by 3,5000 units. Show the effect of these changes
assuming the selling price remains unchanged.
3. If sales price is reduced by 20% and monthly advertising expenses are increased by
$70,000, the unit sales are expected to increase by 100%. Show the effect of this
change by preparing a new income statement of Goats Head Soup Company.
4. The Goats Head Soup wants to make the packing of its product more attractive. The
new packing would increase cost by $1.20 per unit. Assuming no other changes,
compute the number of units to be sold to earn a net operating income of $9,000.
5. The company is planning to purchase a new machine. The installation of new
machine will increase fixed cost by $236,000 and decrease unit variable expenses
by 50%
(a). Compute the CM ratio and break-even point if the new machine is installed
(b). Company expects a sale of 20,000 units for the next month. Prepare two
income statement, one assuming that the machine is not installed and one
assuming that it is installed.
(c) Should the company install new machine? Give your recommendations.

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