Question : The objective of this homework exercise to illustrate the calculation : 5960
The objective of this homework exercise is to illustrate the calculation and use of several important managerial issues relating to CVP, including breakeven and indifference points, target profit, cost structure and production decisions.
No Streak, Inc. manufactures windshield wipers for its single client, Go Fast Motors. No Streak sells each wiper to Go Fast for $25. Direct material costs per unit equal $4 and direct labor cost per unit equals $1. Also, No Streak incurs $5 of variable overhead costs for every unit that it manufactures and sells. Finally, the fixed costs associated with No Streak’s manufacturing plant equal $20,000 and the fixed costs related to No Streak’s marketing and distribution equal $30,000.
1. [Basic breakeven analysis.] Calculate No Streak’s breakeven point output volume.
2. [Profit goals and taxes.] What output volume would No Streak need to achieve to generate a $15,000 pre-tax profit? What output volume would No Streak need to achieve to generate an after-tax profit of $15,000? [No Streak’s tax rate is 40%].
3. [Changing cost structures.] No Streak realizes that its biggest competitor, Spot Free, manufactures its windshield wipers in an overseas production plant. Spot Free is able to produce wipers at a significantly lower cost due to the lower labor cost in its overseas plant. In order to compete more effectively on costs, No Streak is considering changing its cost structure by automating a greater portion of its manufacturing process. Specifically, No Streak’s new cost structure would increase total fixed costs to $100,000 and reduce variable cost per unit to $5. At what level of output volume would No Streak be indifferent between the current cost structure and the proposed new cost structure? What profit is generated at this output volume?
4. [Changing revenue and cost structures.] Assume the same information as in #3. However, Spot Free believes that in addition to the new cost structure, it will also need to lower its price per unit to $23 to remain competitive. At what level of output volume would No Streak be indifferent between the current cost and revenue structure and this new alternative cost and revenue structure? What profit is generated at this output volume?
5. [Putting it all together.] Which cost structure should No Streak select? What factor plays a very large role in helping to answer this question?
6. [Multiple Product CVP.] No Streak has decided to stay with its current cost and revenue structure. Instead, No Streak has elected to add Sheer Shine, a miraculous windshield cleaning solution, to its product mix offering. The variable cost to manufacture and sell each bottle of Sheer Shine is $7 and each bottle sells for $10. Additional fixed costs of $10,000 are required to manufacture Sheer Shine. Based on analyses of competitors, No Streak estimates that it would manufacture and sell two bottles of Sheer Shine for every three windshield wipers that it manufactures and sells. Assuming this product mix is accurate, how many windshield wipers and bottles of Sheer Shine must No Streak sell in order to breakeven this year?
7. [Sensitivity Analysis.] No streak defines CVP risk as the variation (or range) in net income that would result from specific changes in critical CVP inputs. Assume that No Streak expects to sell 6,000 Windshield Wipers and 4,000 bottles of Sheer Shine. Compute and rank in descending order of CVP risk each of the following three changes in CVP inputs associated with the multiple product CVP analysis in requirement 6: (A) The price for each bottle of Sheer Shine falls from $10 to $8. (B) The variable overhead cost for each windshield wiper increases from $5 to $10. (C) The fixed marketing and distribution costs increase from $30,000 to $45,000.