Managerial Accounting for Managers Case 4-33
Textbook case:
Managerial Accounting for Managers, 2nd edition Noreen, Brewer and Garrison (McGraw-Hill/Irwin, 2008).
Case 4-33 Cost Structure; Target profit and Break-Even Analysis
Contribution Income Statement for all three scenarios:
15% commission 20% commission Own sales force Sales $16,000,000 $16,000,000 $16,000,000
Variable manuf. cost $7,200,000 $7,200,000 $7,200,000
Commissions $2,400,000 $3,200,000 $1,200,000
-Tot. variable cost ($9,600,000) ($10,400,000) ($8,400,000) Contribution margin $6,400,000 $5,600,000 $7,600,000
Fixed overhead $2,340,000 $2,340,000 $2,340,000
Fixed marketing $120,000 $120,000 $2,520,000
Fixed administrating $1,800,000 $1,800,000 $1,725,000
Fixed interest $540,000 $540,000 $540,000
-Tot. fixed cost ($4,800,000) ($4,800,000) ($7,125,000)
Income before tax $1,600,000 $800,000 $475,000
Tax 30% ($480,000) ($240,000) ($142,500)
Net Income $1,120,000 $560,000 $332,500
In the third scenario of Pittman’s own sales force, I included the salaries of sales manager, salespeople, travel, entertainment, and advertising expenses under fixed marketing expense and I reduced fixed administrating expenses by $75,000:
Fixed marketing = $120,000+$2,400,000=$2,520,000
Administrating expense: $1,800,000-$75,000=$1,725,000
Contribution margin for all three scenarios:
15% commission 20% commission Own sales force
Tot. Contribution margin $6,400,000 $5,600,000 $7,600,000
Sales $16,000,000 $16,000,000 $16,000,000
CM Ratio (TCM/Sales) 40% 35% 47.5%
1. Compute Pittman’s break-even point in sales dollars for next year for all three scenarios
a) The agents’ commission remains unchanged at 15%
BE point = Fixed costs/CM ratio = $4,800,000/0.4 = $12,000,000
b) The agents’ commission is increased to 20%
BE point = $6,400,000/0.35 = $13,714,286
c) The company
Managerial Accounting for Managers, 2nd edition Noreen, Brewer and Garrison (McGraw-Hill/Irwin, 2008).
Case 4-33 Cost Structure; Target profit and Break-Even Analysis
Contribution Income Statement for all three scenarios:
15% commission 20% commission Own sales force Sales $16,000,000 $16,000,000 $16,000,000
Variable manuf. cost $7,200,000 $7,200,000 $7,200,000
Commissions $2,400,000 $3,200,000 $1,200,000
-Tot. variable cost ($9,600,000) ($10,400,000) ($8,400,000) Contribution margin $6,400,000 $5,600,000 $7,600,000
Fixed overhead $2,340,000 $2,340,000 $2,340,000
Fixed marketing $120,000 $120,000 $2,520,000
Fixed administrating $1,800,000 $1,800,000 $1,725,000
Fixed interest $540,000 $540,000 $540,000
-Tot. fixed cost ($4,800,000) ($4,800,000) ($7,125,000)
Income before tax $1,600,000 $800,000 $475,000
Tax 30% ($480,000) ($240,000) ($142,500)
Net Income $1,120,000 $560,000 $332,500
In the third scenario of Pittman’s own sales force, I included the salaries of sales manager, salespeople, travel, entertainment, and advertising expenses under fixed marketing expense and I reduced fixed administrating expenses by $75,000:
Fixed marketing = $120,000+$2,400,000=$2,520,000
Administrating expense: $1,800,000-$75,000=$1,725,000
Contribution margin for all three scenarios:
15% commission 20% commission Own sales force
Tot. Contribution margin $6,400,000 $5,600,000 $7,600,000
Sales $16,000,000 $16,000,000 $16,000,000
CM Ratio (TCM/Sales) 40% 35% 47.5%
1. Compute Pittman’s break-even point in sales dollars for next year for all three scenarios
a) The agents’ commission remains unchanged at 15%
BE point = Fixed costs/CM ratio = $4,800,000/0.4 = $12,000,000
b) The agents’ commission is increased to 20%
BE point = $6,400,000/0.35 = $13,714,286
c) The company