You are the Certified Managerial Accountant (CMA) for Southwood Company. You have worked for the company for several years and your responsibilities include working with managers to analyze business decisions by allocating production costs to goods, and creating budgets and production forecasts. You also provide information to the external accountant for preparation of the financial statements. Your opinion is well respected and you have successfully worked with management on several big projects in the past. Southwood Company manufactures a single line of footballs in a small plant. Management has been meeting on several ideas they are considering about expansion of the plant as well as your advice on which would be the best alternative for production. After you have prepared the journal entries and income statement for the current year, management has asked you to review the data related to the proposed scenarios and prepare a presentation for top management. Part One: Management has been meeting about different scenarios they have considered to increase sales and improve profitability. They would like to see the results of these scenarios and have sat down with you to have you provide information to help with their decision. Prepare the following items for Management. Compute the CM ratio (round variable expenses to the nearest dollar) and break-even point in balls and the degree of operating leverage at the given sales levels. Due to an increase in labor rates, the company estimates that variable expenses will increase by $2 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what is the new CM ratio and break-even point in balls? If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income as last year? The president feels that the company must raise the selling price of the footballs if the variable expenses increase by $2. If Southwood Company wants to maintain the same CM ratio as the current year, what selling price per ball must it charge to cover the increased costs? (round to the nearest dollar) The company is discussion the construction of a new, automated manufacturing plan. The new plant would slash variable expenses by 40% per ball, but it would cause fixed expenses per year to double. If the new plant is built, what is the company's new CM ratio and break-even point in balls? Prepare a contribution format income statement and compute the degree of operating leverage with the assumption that the new plant is built in the next year and the company manufactures 50,000 balls. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers, thus variable expenses are $14 per ball, of which 56% is direct labor cost. Last year, the company sold 50,636 balls with the following results (rounded): Sales (50,636 balls) ………………………………………………………………… $ 1, 265, 900 Variable Expenses ………………………………………………………………….. 708, 904 Contribution Margin ……………………………………………………………. 557,000 Fixed Expenses …………………………………………………………………… 310,000 Net operating income …………………………………………………………. 247,000 Selling & Admin expenses totaling $310,000 are broken down (based on actual performance, 50,000 balls sold): Sales Commission: $63, 000 Administrative salaries: $90,000. Rent Expense: $5,000 Advertising Expense: $140,000 Depreciation expense: $12,000 Part Two: Management would like to see budget comparisons between continuing operations with the existing plant or opening a new plant. After a review of operations and expenses Management has provided the following information. Prepare a budget comparing operating in the new plant versus continuing operations in the existing plant. Opening new plant: Sales price remains at $25, estimate 55,000 basketballs sold based on additional advertising. Use variable expenses calculated from #5 in Part I. Do not estimate any Overhead variance Sales commissions are 5% of gross sales. Administrative salaries remain unchanged. Rent expense is eliminated because the new plant offers space for administration. Management has decided to increase the advertising budget by 20%. Depreciation on the new plant is $250,000, this is in addition to current depreciation on selling and administrative equipment. Keeping existing plant: Sales price is increased to $29, sales decline to 48,000 because of increase in price. Use variable expenses calculated from # 4, Part I Do not estimate any Overhead variance Sales commissions are 5% of gross sales. Administrative salaries, rent and advertising increase by 5% because of increase in costs. Depreciation expense is $10,000 on selling and administrative equipment

You are the Certified Managerial Accountant (CMA) for Southwood Company. You have worked for the company for several years and your responsibilities include working with managers to analyze business decisions by allocating production costs to goods, and creating budgets and production forecasts. You also provide information to the external accountant for preparation of the financial statements. Your opinion is well respected and you have successfully worked with management on several big projects in the past. Southwood Company manufactures a single line of footballs in a small plant. Management has been meeting on several ideas they are considering about expansion of the plant as well as your advice on which would be the best alternative for production. After you have prepared the journal entries and income statement for the current year, management has asked you to review the data related to the proposed scenarios and prepare a presentation for top management. Part One: Management has been meeting about different scenarios they have considered to increase sales and improve profitability. They would like to see the results of these scenarios and have sat down with you to have you provide information to help with their decision. Prepare the following items for Management. Compute the CM ratio (round variable expenses to the nearest dollar) and break-even point in balls and the degree of operating leverage at the given sales levels. Due to an increase in labor rates, the company estimates that variable expenses will increase by $2 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what is the new CM ratio and break-even point in balls? If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income as last year? The president feels that the company must raise the selling price of the footballs if the variable expenses increase by $2. If Southwood Company wants to maintain the same CM ratio as the current year, what selling price per ball must it charge to cover the increased costs? (round to the nearest dollar) The company is discussion the construction of a new, automated manufacturing plan. The new plant would slash variable expenses by 40% per ball, but it would cause fixed expenses per year to double. If the new plant is built, what is the company's new CM ratio and break-even point in balls? Prepare a contribution format income statement and compute the degree of operating leverage with the assumption that the new plant is built in the next year and the company manufactures 50,000 balls. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers, thus variable expenses are $14 per ball, of which 56% is direct labor cost. Last year, the company sold 50,636 balls with the following results (rounded): Sales (50,636 balls) ………………………………………………………………… $ 1, 265, 900 Variable Expenses ………………………………………………………………….. 708, 904 Contribution Margin ……………………………………………………………. 557,000 Fixed Expenses …………………………………………………………………… 310,000 Net operating income …………………………………………………………. 247,000 Selling & Admin expenses totaling $310,000 are broken down (based on actual performance, 50,000 balls sold): Sales Commission: $63, 000 Administrative salaries: $90,000. Rent Expense: $5,000 Advertising Expense: $140,000 Depreciation expense: $12,000 Part Two: Management would like to see budget comparisons between continuing operations with the existing plant or opening a new plant. After a review of operations and expenses Management has provided the following information. Prepare a budget comparing operating in the new plant versus continuing operations in the existing plant. Opening new plant: Sales price remains at $25, estimate 55,000 basketballs sold based on additional advertising. Use variable expenses calculated from #5 in Part I. Do not estimate any Overhead variance Sales commissions are 5% of gross sales. Administrative salaries remain unchanged. Rent expense is eliminated because the new plant offers space for administration. Management has decided to increase the advertising budget by 20%. Depreciation on the new plant is $250,000, this is in addition to current depreciation on selling and administrative equipment. Keeping existing plant: Sales price is increased to $29, sales decline to 48,000 because of increase in price. Use variable expenses calculated from # 4, Part I Do not estimate any Overhead variance Sales commissions are 5% of gross sales. Administrative salaries, rent and advertising increase by 5% because of increase in costs. Depreciation expense is $10,000 on selling and administrative equipment

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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Southwood Company manufactures a single line of footballs in a small plant. Management has been meeting on several ideas they are considering about expansion of the plant as well as your advice on which would be the best alternative for production. After you have prepared the journal entries and income statement for the current year, management has asked you to review the data related to the proposed scenarios and prepare a presentation for top management.

Part One: Management has been meeting about different scenarios they have considered to increase sales and improve profitability. They would like to see the results of these scenarios and have sat down with you to have you provide information to help with their decision. Prepare the following items for Management.

Compute the CM ratio (round variable expenses to the nearest dollar) and break-even point in balls and the degree of operating leverage at the given sales levels.
Due to an increase in labor rates, the company estimates that variable expenses will increase by $2 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what is the new CM ratio and break-even point in balls?
If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income as last year?
The president feels that the company must raise the selling price of the footballs if the variable expenses increase by $2. If Southwood Company wants to maintain the same CM ratio as the current year, what selling price per ball must it charge to cover the increased costs? (round to the nearest dollar)
The company is discussion the construction of a new, automated manufacturing plan. The new plant would slash variable expenses by 40% per ball, but it would cause fixed expenses per year to double. If the new plant is built, what is the company's new CM ratio and break-even point in balls?
Prepare a contribution format income statement and compute the degree of operating leverage with the assumption that the new plant is built in the next year and the company manufactures 50,000 balls.

The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers, thus variable expenses are $14 per ball, of which 56% is direct labor cost.

Last year, the company sold 50,636 balls with the following results (rounded):

Sales (50,636 balls) ………………………………………………………………… $ 1, 265, 900

Variable Expenses ………………………………………………………………….. 708, 904

Contribution Margin ……………………………………………………………. 557,000

Fixed Expenses …………………………………………………………………… 310,000

Net operating income …………………………………………………………. 247,000

Selling & Admin expenses totaling $310,000 are broken down (based on actual performance, 50,000 balls sold):

Sales Commission: $63, 000

Administrative salaries: $90,000.

Rent Expense: $5,000

Advertising Expense: $140,000

Depreciation expense: $12,000

Part Two: Management would like to see budget comparisons between continuing operations with the existing plant or opening a new plant. After a review of operations and expenses Management has provided the following information. Prepare a budget comparing operating in the new plant versus continuing operations in the existing plant.

Opening new plant:
- Sales price remains at $25, estimate 55,000 basketballs sold based on additional advertising.
- Use variable expenses calculated from #5 in Part I.
- Do not estimate any Overhead variance
- Sales commissions are 5% of gross sales.
- Administrative salaries remain unchanged.
- Rent expense is eliminated because the new plant offers space for administration.
- Management has decided to increase the advertising budget by 20%.
- Depreciation on the new plant is $250,000, this is in addition to current depreciation on selling and administrative equipment.
Keeping existing plant:
- Sales price is increased to $29, sales decline to 48,000 because of increase in price.
- Use variable expenses calculated from # 4, Part I
- Do not estimate any Overhead variance
- Sales commissions are 5% of gross sales.
- Administrative salaries, rent and advertising increase by 5% because of increase in costs.
- Depreciation expense is $10,000 on selling and administrative equipment.

Part Three: Management would like you to make a recommendation to either continue operating in the
existing plant or constructing a new plant. You will use the information you have gathered from the Cost-
Volume-Profit Analysis and the budgets you prepared. There is no right or wrong answer, this is based on
your analysis and understanding of the company. Management strategy over the next 5 years is to add
additional product lines, the current plant would need to be remodeled, but the new plant is large enough to
be able to accommodate these plans if demand is there.

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