Fraser Co. is considering a ch
| Fraser Co. isconsidering a change to its cost structure. Below is the datarelating to the current structure as well as the proposedchange. | ||||||||
| Current Structure | Proposed Structure | |||||||
| Unit Sales | 20,000 | Unit Sales | 20,000 | |||||
| Sales Price Per Unit | $100 | Sales Price Per Unit | $100 | |||||
| Total Variable Costs (based on20,000 units) | $400,000 | Total Variable Costs (based on 20,000 units) | $700,000 | |||||
| Total Fixed Costs | $900,000 | Total Fixed Costs | $600,000 | |||||
| 1.)Prepare a CVP Statement for each cost structure. Incorporate cellreferences and formulas where indicated. You can instantly createthe CVP Statement for the Proposed Structure, by copying andpasting your completed CVP Statement for the Current Structure.Make sure all highlighted areas are completed. Try to avoid theheadings when copying. You want to keep the Proposed Structureheading. | ||||||||
| CVP Statement – CurrentStructure | CVP Statement – Proposed Structure | |||||||
| % of Sales | ||||||||
| Total | Per Unit | |||||||
| Type a Label Here | formula | cell reference | formula | |||||
| Type a Label Here | cell reference | formula | formula | |||||
| Type a Label Here | formula | formula | formula | |||||
| Type a Label Here | cell reference | |||||||
| Type a Label Here | formula | |||||||
| 2.)Use the Contribution Margin technique to calculate the Breakevenpoint in units and dollars for each scenario. You can save timeagain by copying from one section to the next. Be careful with theheadings. | ||||||||
| Breakeven Units – CurrentStructure | Breakeven Units – Proposed Structure | |||||||
| cell reference | = | formula | cell reference | = | formula | |||
| cell reference | cell reference | |||||||
| Breakeven Sales Dollars -Current Structure | Breakeven Sales Dollars – Proposed Structure | |||||||
| cell reference | = | formula | cell reference | = | formula | |||
| cell reference | cell reference | |||||||
| 3.) Compare the Net OperatingIncome and Breakeven calculations for both scenarios. What happenedto the breakeven point and why? | ||||||||
| Typeresponse here | ||||||||
| 4.) Compute the Degree ofOperating Leverage for both scenarios. Save time again. | ||||||||
| Degree of Operating Leverage -Current Structure | Degree of Operating Leverage – ProposedStructure | |||||||
| cell reference | = | formula | cell reference | = | formula | |||
| cell reference | cell reference | |||||||
| 5.)Use the Degree of Operating Leverage to determine how a 10%increase in sales will impact Net Income. | ||||||||
| Current | Proposal | |||||||
| Degree of OperatingLeverage | cell reference | cell reference | ||||||
| LABEL | Number | cell reference | ||||||
| Net Income Impact | formula | formula | ||||||
| Old Net Income | cell reference | cell reference | ||||||
| LABEL | formula | formula | ||||||
| New Net Income | formula | formula | ||||||
| 6.) Save and print (face-to-face class ) | ||||||||
| 7.) Copy ROWS1-17 of this spreadsheet tab (“ORIGINAL”) to the “Revisions” tab. | ||||||||
| 8.)Use the “Revision” spreadsheet to prove your calculation frominstruction #5 of the “Original” spreadsheet by increasing thesales volume in the data section (gray shaded area) by 10%.Remember to change anything else in the data section which would beaffected by a change in sales volume. You should not make anychanges below row 6. | ||||||||
Answer:
Since, there are multiple parts to the question, I have answeredthe first four.
_______
Part 1)
The CVP structure is given as below:
| CVPStatement – Current Structure | |||
| Total | Per Unit | Percentage | |
| Sales | 2,000,000 | 100 | 100% |
| Variable Costs | 400,000 | 20 | 20% |
| Contribution Margin | 1,600,000 | 80 | 80% |
| Fixed Costs | 900,000 | ||
| Net Operating Income | $700,000 | ||
_____
| CVPStatement – Proposed Structure | |||
| Total | Per Unit | Percentage | |
| Sales | 2,000,000 | 100 | 100% |
| Variable Costs | 700,000 | 35 | 35% |
| Contribution Margin | 1,300,000 | 65 | 65% |
| Fixed Costs | 600,000 | ||
| Net Operating Income | $700,000 | ||
_____
Part 2)
The breakeven point in units and dollars under each structurecan be calculated with the use of formulas given below:
Breakeven Point (in Units) = Fixed Cost/Contribution Margin PerUnit
Breakeven Point (in Dollars) = Fixed Cost/Contribution MarginPercentage
_____
Substituting values in the above formula, we get,
CurrentStructure
Breakeven Point (in Units) = 900,000/80 =11,250 units
Breakeven Point (in Dollars) = 900,000/80% =$1,125,000
_____
ProposedStructure
Breakeven Point (in Units) = 600,000/65 =9,230.77 units or 9,231 units
Breakeven Point (in Dollars) = 600,000/65% =$923,076.92 or $923,077
_____
Part 3)
Based on the calculations made in Part 1) and Part 2), we canobserve that the net operating income has remained constant at$700,000 under both the current and proposed structure. However,the breakeven point in both units and dollars has declined underthe proposed structure. It is because of the reduction in the valueof fixed costs from $900,000 to $600,000 which is proportionatelymore than the increase in variable cost per unit.
_____
Part 4)
The degree of operating leverage can be calculated with the useof following formula:
Degree of Operating Leverage = Contribution Margin/Net OperatingIncome
Using the values calculated in Part 1), we get,
Degree of Operating Leverage (CurrentStructure) = 1,600,000/700,000 = 2.29
Degree of Operating Leverage (ProposedStructure) = 1,300,000/700,000 = 1.86
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