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    Master in Business Administration: MPMA7113 Managerial Accounting (Assignment 1)

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    yana kiut
    1. Mirabel Manufacturing's overall break-even point is $31,516,184 in sales if commissions remain at 12%. 2. Increasing commissions to 15% would raise the break-even point to $33,617,481 but lower the margin of safety below $2 million. 3. Purchasing $1.2 million in new equipment would decrease variable costs but increase fixed costs, raising the break-even point to $33,617,481 but again lowering the margin of safety below the target. 4. Investing $650,000 in marketing could raise sales 8% and increase the break-even point to $33,979,591 but would further lower the

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    Master in Business Administration: MPMA7113 Managerial Accounting (Assignment 1)

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    1. Mirabel Manufacturing's overall break-even point is $31,516,184 in sales if commissions remain at 12%. 2. Increasing commissions to 15% would raise the break-even point to $33,617,481 but lower the margin of safety below $2 million. 3. Purchasing $1.2 million in new equipment would decrease variable costs but increase fixed costs, raising the break-even point to $33,617,481 but again lowering the margin of safety below the target. 4. Investing $650,000 in marketing could raise sales 8% and increase the break-even point to $33,979,591 but would further lower the

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    1. Mirabel Manufacturing's overall break-even point is $31,516,184 in sales if commissions remain at 12%. 2. Increasing commissions to 15% would raise the break-even point to $33,617,481 but lower the margin of safety below $2 million. 3. Purchasing $1.2 million in new equipment would decrease variable costs but increase fixed costs, raising the break-even point to $33,617,481 but again lowering the margin of safety below the target. 4. Investing $650,000 in marketing could raise sales 8% and increase the break-even point to $33,979,591 but would further lower the

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    851 views8 pages

    Master in Business Administration: MPMA7113 Managerial Accounting (Assignment 1)

    Uploaded by

    yana kiut
    1. Mirabel Manufacturing's overall break-even point is $31,516,184 in sales if commissions remain at 12%. 2. Increasing commissions to 15% would raise the break-even point to $33,617,481 but lower the margin of safety below $2 million. 3. Purchasing $1.2 million in new equipment would decrease variable costs but increase fixed costs, raising the break-even point to $33,617,481 but again lowering the margin of safety below the target. 4. Investing $650,000 in marketing could raise sales 8% and increase the break-even point to $33,979,591 but would further lower the

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    © All Rights Reserved
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    of 8

    MASTER IN BUSINESS ADMINISTRATION

    MPMA7113

    MANAGERIAL ACCOUNTING

    (ASSIGNMENT 1)

    PREPARED FOR

    DR. ABU SOFIAN BIN YAACOB

    STUDENT NAME STUDENT ID

    MASNIZA BINTI ABD MUTALIB 201711040010

    NUR ASYIKIN BINTI SUMARDI 201306030039

    FAIRUZZIHA HAZWANY BT MOHAMMAD YUSOFF 201711040019


    Assignment: Cost Volume Profit Analysis
    Scenario
    Mirabel Manufacturing is a small but growing company that manufactures and sells marine sonar
    equipment. They employee a national sales force and their primary customers are marine retailers
    and boat dealerships. The company has expanded over the last 5 years and Paul Mirabel, the
    founder and CEO has become concerned that he no longer has a clear picture of their cost
    structure. He calls his CFO, Mary Jane Montgomery in for a meeting.
    “Mary Jane, I am concerned that I am not current on our cost structure and how that is impacting
    our bottom line,” Paul begins.
    “Well, Paul, the company has grown considerably over the past 5 years, so I’m not surprised that
    you feel a little disconnected with how things are going,” Mary Jane replied. She continued “In fact,
    I’ve been meaning to talk to you about a couple of big items such as increasing the sales
    commission to 15%. We’ve lost two of our best account managers in the last 9 months. It seems
    like we are behind the curve paying only 12% on gross sales.”
    “What do you mean we are behind the curve,” Paul replied angrily. “We have always been the
    leader in every aspect of our business.”
    “Well, that may have been the case in the past, Paul, but frankly we need to step up our
    compensation package to stay competitive,” Mary Jane replied. She continued, “And that’s not
    everything. I met with Frank Jacobs from marketing and he said we need to have a bigger presence
    at the trade show in March. He told me he would need about $650,000 added to the marketing
    budget to support new marketing materials.”
    “Come on, Mary Jane, how can we do that when we are going to have to increase commission?” He
    continued, “I spoke with Dan Clark in production and he indicated that we have two pieces of
    equipment that need to be replaced by the end of the quarter and that’s going to set us back
    almost $1.2 million.”
    Mary Jane shook her head. “Paul, I hate to bring this up but while we are talking costs, but Bob in
    purchasing stopped by the office and dropped off some revised cost information – it looks like
    several of our suppliers are talking about significant price increases by the end of the year.”
    Paul slumped in his chair. “This is a mess, Mary Jane. Increasing commissions, new equipment,
    materials price increases and marketing expenses all at once. Even if Frank Mallow is correct that
    we should see a 10% increase in sales for the coming year, I just don’t see how we can make this
    work. We have to maintain enough profit to keep the shareholders happy and I can’t sleep when
    we dip below that $2 million margin of safety.”
    Mary Jane gathered up her papers. “Before you get too distressed, let me put together some figures
    and let’s see what this looks like on paper. I’ll get back to you by the end of the week. In the
    meantime, stay positive, we’ll find the best solution.”
    The following income and cost data for Mirabel is provided:

    2
    Mirabel Manufacturing
    Budgeted Income Statement
    For the Year Ending December 31
    Sales $ 36,750,000
    Cost of goods sold:
    Variable $ 13,300,000
    Fixed $ 9,300,000
    Gross Margin $ 14,150,000
    Selling & Administrative
    Commissions $ 4,410,000
    Fixed Marketing Expenses $ 1,350,000
    Fixed Administrative $ 6,000,000
    Net Operating Income $ 2,390,000

    Model 101 Model 201 Model 301


    Normal Annual Sales Volume 16,000 19,000 11,000
    Unit Selling Price $ 650 $ 750 $ 1,100
    Variable expense per unit $ 250 $ 200 $ 500

    3
    Questions

    (Note: Each of the following questions is independent of the others)

    1. What is Mirabel’s over-all break-even point in sales dollars?

    Fixed cost/contribution margin per unit

    Here Fixed cost =Fixed Cost of goods sold + Fixed Marketing Expenses +Fixed
    Administrative

    = $9,300,000 + $1,35,000+ $6,000,000 = $15,43,5000.

    Contribution Margin per unit= Sales Per unit - variable expenses Per unit

    Sales

    Model 101 = 16000 units x $650 =$10,400,000

    Model 201 = 19000 units x $750 =$14,250,000

    Model 301 = 11000 units x $1100= $12,100,00

    Hence Total Sales =$36,750,000

    Sales Per unit = $36,750,000/(16000 units +19000 units +11000 units) =$798.91

    Variable expenses per unit = (16000 units x $250 +19000 units x $200 +11000 units
    x $500)/(16000 units +19000 units +11000 units) =$289.13

    Hence Contribution Margin = ($798.91-$289.13)=$509.78

    4
    Hence Break even point in Units = $15,43,5000/$509.78= 30278 units

    Hence Break Even point in Sales Dollars = Sales Price X Break Even point units =
    $798.91 x 30278 units =$24,189,397.

    Over-all break-even point in sales dollars=$31,516,184

    2. Assume that sales revenue remains constant, what is the impact on break-even and the
    margin of safety if Paul takes Mary Jane’s advice and increases sales commission to
    15%?

    If Sales commission 15% then sales commission increase per unit=($4,410,000 x


    15%)/46000 units =$14.38

    And variable expenses per unit would be = $289.13+$14.38=$303.51

    Hence Contribution margin per unit would be = $789.91 -$303.51=$495.40

    Break even point in units = $15,43,5000/$495.40=31157 units

    Hence Break Even point in Sales Dollars = 31157 units x $789.91=$24,891,639.

    Margin of Safety = Actuals Sales - Break Even points = $36,750,000-$24,891,639


    =$11,858,361

    The Over-all break-even point in sales dollars will increase by $1,897,422 while
    Margin of safety will decrease by $1,897,422

    3. If Mirabel purchases the new equipment for $1,200,000, it will increase fixed costs by
    10% but will decrease the variable cost per unit for all 3 models by 5%. What will
    Mirabel’s new break-even point be?
    5
    If fixed increase by 10% then new fixed cost would be =$15,43,500 x
    110%=$16,978,500

    If variable expense reduce by 5% then new variable expenses per unit =$289.13x
    95% =$274.67.

    Contribution margin per unit =$789.91-$274.67 =$524.24

    Break even points in units = $16,978,500/$524.24=32387 units

    Break even point in Sales Dollars = 32387 units x $789.91 =$25,874,298.


    New Over-all break-even point in sales dollars=$33,617,481

    4. If Mirabel invests the additional $650,000 in fixed marketing expenses, sales of the
    Model 301 are expected to increase by 8%. What is the break-even and margin of
    safety under these circumstances?

    4.if $6,500,00 invest in in fixed marketing expenses then fixed cost would stand =
    $15,43,500 +$6,500,00 =$16,085,000

    if Sales of model 301 is increased by 8% then total sales would be

    Model 101 = 16000 units x $650= $10,40,0000

    Model 201 = 19000 units x $750= $14,250,000

    Model 301 = (11000 units x 108%) x $1100 =$13,068,000

    Total sales units =46880 units and Sales = $37,718,000 ,Sales Per unit =$804.56

    6
    Contribution margin per unit =$804.56 -$289.13=$515.43

    Break even point in units =$16,085,000/ $515.43=31207 units

    Break even points in Sales Dollars = 31207 units x $804.56= $25,107,866.


    The Over-all break-even point in sales dollars will increase by $1,273,808 while
    Margin of safety will decrease by $1,273,808

    5. If the projection is that sales will increase by 10% in the coming year, can the company
    afford to also increase commission from 12% to 15%? Why or why not.
    Break Even Point: $33,979,591.84
    Safety Margin: $6,445,408.16

    6. Assume that sales volume remains fixed but there is a 5% increase in variable
    expenses (materials cost) for the Model 101 and 301, and a 10% increase in variable
    expenses for Model 201. What is the new break-even?

    If variable expense reduce by 5% then new variable expenses per unit =$289.13x
    95% =$274.67.

    Contribution margin per unit =$789.91-$274.67 =$524.24

    Break even points in units = $16,978,500/$524.24=32387 units

    Break even point in Sales Dollars = 32387 units x $789.91 =$25,874,298.


    New Over-all break-even point in sales dollars=$33,617,481

    Report

    Prepare a report from Mary Jane to Don explaining how these changes will affect Mirabel’s
    overall cost structure. For those changes that are controllable, make a recommendation
    considering the uncontrollable cost changes. Be certain to consider not only the company’s
    break-even point, but also the desired margin of safety.

    7
    Answer

    If the sales do increase an additional 10%, I recommend that you increase the
    commissions. Thiswould be affordable and raise your break-even point and margin of
    safety to $33,979,591.84 and $6,445,408.16 respectively. I would not suggest that you
    purchase the equipment outright. This would drop your margin of safety below the $2
    million margin. If you purchase it and amortize the expenses over a 10 year useful life,
    then the safety margin would be $2,611,111.11. There are not many variables that are
    within your control so any decision you make on cost structure should be based on
    future success.

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