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Kathleen Sebilus Inc._CVP Analysis

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Question;Kathleen Sebilus Inc.;contribution format income statement for the most recent month is given below;Sales (47,000 units) $987,000;Variable;expenses 690,900;Contribution margin 296,100;Fixed;expenses 236,880;Net operating income $59,220;The industry in which Kathleen Sebilus Inc.;operates is quite sensitive to cyclical movements in the economy. Thus, profits;vary considerably from year to year according to general economic conditions.;The company has a large amount of unused capacity and is studying ways of;improving profits.;Required;1.;New;equipment has come on the market that would allow Kathleen Sebilus Inc. to;automate a portion of its operations. Variable expenses would be reduced by;$6.30 per unit. However, fixed expenses would increase to a total of $532,980;each month. Prepare two contribution format income statements, one showing;present operations and one showing how operations would appear if the new;equipment is purchased. (Input all amounts as positive values except losses;which should be indicated by minus sign. Round your "Per unit;answers to 2 decimal places. Omit the "$" and "%" signs in;your response.);Present Proposed;Amount Per;Unit % Amount Per Unit %;$;$ % $ $ %;$ % $ %;$ $;2. Refer;to the income statements in (1) above. For both present operations and the;proposed new operations, Compute;a. The degree of operating leverage.;Present;Proposed;Degree;of operating leverage;b. The break-even point in dollars.;(Omit the "$" sign in your response.);Present Proposed;Break-even;point in dollars $ $;c. The;margin of safety in both dollar and percentage terms. (Omit the "$;and "%" signs in our response.);Present Proposed;Margin;of safety in dollars $ $;Margin;of safety in percentage % %;3.Refer again to the data in (1) above.;As a manager, what factor would be paramount in your mind in deciding whether;to purchase the new equipment? (Assume that ample funds are available to make;the purchase.);Stock level maintained;Cyclical;movements in the economy;Reserves;and surplus of the company;Performance;of peers in the industry;4. Refer to the;original data. Rather than purchase new equipment, the marketing manager argues;that the company?s marketing strategy should be changed. Instead of paying;sales commissions, which are included in variable expenses, the marketing;manager suggests that salespersons be paid fixed salaries and that the company;invest heavily in advertising. The marketing manager claims that this new;approach would increase unit sales by 50% without any change in selling price;the company?s new monthly fixed expenses would be $296,100, and its net;operating income would increase by 25%. Compute the break-even point in dollar;sales for the company under the new marketing strategy. (Omit the "$;sign in your response.);New break even point in dollar sales $;check;my workeBook Links (4)references;$ $

 

Paper#37286 | Written in 18-Jul-2015

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