ACCT IS 710: Managerial Accounting

Assignment #2 (8 points)

Please feel free to provide responses in the spaces below or utilize Excel, etc. If using Excel or another form of
submission please clearly label your responses for ease of identification.

Question #1: (note there are two (2) requirements for this question)

Newman Company has recorded sales revenue of $1,260,000, variable costs of $570,000, and fixed costs of $480,500.

Instructions: You may ignore the effect of taxes. Round ratios or interim calculations to six (6) decimal places (e.g.,
0.666666). Please show any work you feel is relevant as it may help assign partial credit, if available.

1. At what sales dollar amount did Newman Company earn a before-tax profit of $200,000? (1 point)

Answer: Using solver to set the profit at $200,000 by varying the variable cost and sales, we get sales of $1,252,113.71
(The profit was $199,999.79)

Sales = $1,252,113.71

2. At what sales dollar amount did Newman Company break even? (1 point)

Answer: Using solver to set the profit at $0 by varying the variable cost and sales, we get sales of $1,086,090.18 (The
profit was $(0.21))

Sales = $1,086,090.18

Question #2:

Costanza Company has 10,000 obsolete clocks which cost $12 each to manufacture. Each clock can be sold as-is for $4
or Costanza Company can re-work the clocks for a total amount of $55,000 and then sell each clock for $10. You are
tasked with deciding whether to take option #1 which is to sell the clocks as they are or to take option #2 which is to re-
work the clocks before selling. All clocks can be sold. Each clock requires the same amount of re-work. Costanza
Company is a profit seeking company so the objective is to maximize revenue and/or profit and/or reduce losses if they
occur.

Instructions: Please show any work you feel is relevant as it may help assign partial credit, if available.
1. State which option you would choose and explain why your decision supports Costanza Companys objective.
(2 points)

Answer: If the company sells all the clocks at $4, they will incur a loss of $80,000 on 10,000 clocks. Whereas, if they
invest $55,000 in rework, they will incur a loss of $75,000.
Since the companys objective is maximizing profits or minimizing losses, the company should invest in rework and sell
all 10,000 clocks for $10.
Option 1 Option 2

SP 4 SP 10
Units 10000 Units 10000
Total Sales 40000 FC 55000
Loss 80000 Total Sales 100000
Loss 75000

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Question #3: (note there are three (3) requirements for this question)

Kramerica Shoe Company produces its most famous shoe, the Jerry Loafer, that sells for $60 per pair. Profit last year for
Kramerica was as follows (you may ignore the effect of taxes):

Sales revenue ($60 per pair) $300,000

Variable cost ($25 per pair) $125,000
Contribution margin $175,000
Fixed cost $100,000
Profit $75,000

Kramerica would like to increase its profit over the next year by at least 25%. To do so, Kramerica is considering the
following options:

1. Replace a portion of its variable labor with an automated machining process. This would result in a 20% decrease
in variable cost per pair, but a 15% increase in fixed costs. Sales would remain unchanged.

2. Spend $30,000 on a new advertising campaign (a fixed cost), which would increase sales by 20%.

3. Increase the selling price by $10 per pair and increase variable costs by $7 per pair by using a higher quality
leather material in the production of its shoes. The higher priced shoe would cause demand to drop by 10%.

4. Add a second manufacturing facility which would double fixed costs, but would increase sales by 60%.

Requirements:

1. Calculate the resulting profit (i.e., operating income) for each of the options above. Please label your
responses as 3.1 for option 1, 3.2 for option 2, 3.3 for option 3 and 3.4 for option 4 for ease of identification.
(1 point)
Answer: 3.1 Profit achieved - $85,000
3.2 Profit achieved - $80,000
3.3 Profit achieved - $71,000
3.4 Profit achieved - $80,000

2. Identity which, if any, of the options meet or exceed Kramericas targeted increase in profit of 25% and
explain your reasoning. If none, explain your reasoning. (0 points)

Answer: Since Kramerica want their profits to increase by 25%, the target profit is $93,500. As we see in part 1 of the
problem, none of the cases yield the desired profit levels or more.

3. What is the percentage increase or decrease in profit if Kramerica implements options 1 and 2 together?
(Assume the 15% increase in fixed cost from option 1 occurs first followed by the advertising campaign in
option 2). (1 point)

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Answer: If options 1 and 2 are implemented together, the resulting profit would be $95,000; which is an increase of
26.67% over last years profit.

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Question #4:

Rusty's is a large discount grocery/superstore. Profits are declining, so you as the manager, have collected data on selling
prices and variable costs for different food categories. The data that follows are relevant to your frozen foods category and
is presented in equivalent square-foot packages. You have analyzed your shelf space availability and have determined you
can devote a total of 250 square feet across the four food items listed below. The maximum square feet a particular food
item can have is 100 square feet and the minimum is 24 square feet.

Ice
Cream Juices Frozen Dinner Frozen Vegetables
Selling Price per Unit $12.00 $13.00 $24.00 $9.00
(square-foot package)

Variable Costs per Unit $8.00 $10.00 $20.50 $7.00

(square-foot package)

Instructions: For ease of identification please indicate the food item followed by the number of square feet (e.g., Juices:
30 sq. feet). Please show any work you feel is relevant as it may help assign partial credit, if available. You must use all
four (4) food items in your response.

1. Given your shelf space constraint, and assuming you can sell whatever amount you display on the shelves,
what shelf mix (i.e., what number of shelf space for each item listed in the above table) will maximize Rusty's
total contribution margin from these four food items? (2 points)

Answer: Using solver once again and using appropriate constraints,

Ice Cream + Juices + Frozen Dinner + Frozen Vegetables = 250

24 <= Ice Cream <= 100
24 <= Juices <= 100
24 <= Frozen Dinner <= 100
24 <= Frozen Vegetables <= 100

we get the following results.

Ice Cream = 100
Juices = 26
Frozen Dinner = 100
Frozen Vegetables = 24

Maximized contribution margin = $876.00