Asked by Janay Johnson on May 06, 2024
Verified
For two years Annette Larson has been the manager of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll whose "clothes" are made of acetate and stay on the doll with static electricity. The company's sales were mainly to large educational institutions until last year when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately and enough orders were received to keep the department at full capacity for the immediate future.
The fixed costs for the department are $50000 with $1 per unit variable costs. A paper doll and one set of clothes sell for $3. The maximum volume is 80000 units. With the increased volume Ms. Larson is considering two options to improve profitability. One would reduce variable costs to $0.75 and the other would reduce fixed costs to $35000.
Required:
Given the fact that sales are increasing make a short (one paragraph) recommendation to Ms. Larson about which option she should choose. Support your recommendation with a calculation showing her how profitability will change with each option.
Variable Costs
Costs that change in proportion to the level of activity or volume of goods produced in a business.
Fixed Costs
Costs that do not vary with the level of production or business activity, such as rent or salaries.
Profitability
A measure of the efficiency and effectiveness of a company in generating profits from its operations.
- Utilize cost-volume-profit analysis for decision making in scenarios of changing sales volume.
- Understand and apply the concept of the break-even point in business planning and analysis.
Verified Answer
DL
Destany LillianMay 12, 2024
Final Answer :
The variable costs should be reduced to $0.75 per unit in order to ensure maximum profitability of the paper doll product line. The calculations are as follows: Current Profit =($3×80,000)−($1×80,000)−$50,000=$240,000−$80,000−$50,000=$110,000\begin{aligned}\text { Current Profit } & = ( \$ 3 \times 80,000 ) - ( \$ 1 \times 80,000 ) - \$ 50,000 \\& = \$ 240,000 - \$ 80,000 - \$ 50,000 \\& = \$ 110,000\end{aligned} Current Profit =($3×80,000)−($1×80,000)−$50,000=$240,000−$80,000−$50,000=$110,000
Plan #1: Reduce Variable Costs to $0.75\$ 0.75$0.75
Profit =($3×80,000)−($0.75×80,000)−$50,000=$240,000−$60,000−$50,000=$130,000\begin{aligned}\text { Profit } & = ( \$ 3 \times 80,000 ) - ( \$ 0.75 \times 80,000 ) - \$ 50,000 \\& = \$ 240,000 - \$ 60,000 - \$ 50,000 \\& = \$ 130,000\end{aligned} Profit =($3×80,000)−($0.75×80,000)−$50,000=$240,000−$60,000−$50,000=$130,000
Plan #2: Reduce Fixed Costs to $35,000\$ 35,000$35,000
Profit =($3×80,000)−($1×80,000)−$35,000=$240,000−$80,000−$35,000=$125,000\begin{aligned}\text { Profit } & = ( \$ 3 \times 80,000 ) - ( \$ 1 \times 80,000 ) - \$ 35,000 \\& = \$ 240,000 - \$ 80,000 - \$ 35,000 \\& = \$ 125,000\end{aligned} Profit =($3×80,000)−($1×80,000)−$35,000=$240,000−$80,000−$35,000=$125,000
Plan #1: Reduce Variable Costs to $0.75\$ 0.75$0.75
Profit =($3×80,000)−($0.75×80,000)−$50,000=$240,000−$60,000−$50,000=$130,000\begin{aligned}\text { Profit } & = ( \$ 3 \times 80,000 ) - ( \$ 0.75 \times 80,000 ) - \$ 50,000 \\& = \$ 240,000 - \$ 60,000 - \$ 50,000 \\& = \$ 130,000\end{aligned} Profit =($3×80,000)−($0.75×80,000)−$50,000=$240,000−$60,000−$50,000=$130,000
Plan #2: Reduce Fixed Costs to $35,000\$ 35,000$35,000
Profit =($3×80,000)−($1×80,000)−$35,000=$240,000−$80,000−$35,000=$125,000\begin{aligned}\text { Profit } & = ( \$ 3 \times 80,000 ) - ( \$ 1 \times 80,000 ) - \$ 35,000 \\& = \$ 240,000 - \$ 80,000 - \$ 35,000 \\& = \$ 125,000\end{aligned} Profit =($3×80,000)−($1×80,000)−$35,000=$240,000−$80,000−$35,000=$125,000
Learning Objectives
- Utilize cost-volume-profit analysis for decision making in scenarios of changing sales volume.
- Understand and apply the concept of the break-even point in business planning and analysis.