Paper Topic:
Cost volume profit relationship
Budgeted Income Statement under marginal costing if commission remains the same Sales 30 ,000 ,000 Variable Cost of Goods Sold 17 ,400 ,000 Variable Selling Expense (Commission ) 5 ,400 ,000 br 22 ,800 ,000 Contribution 7 ,200 ,000 Fixed Costs Cost of Goods Sold 2 ,800 ,000 Advertising Expense 800 ,000 Administrative Expense 3 ,200 ,000 br 6 ,800 ,000 Net Operating Income 400 ,000 Budgeted Income Statement under marginal costing if commission increases to 20 Sales 30 ,000 ,000 p
Variable Cost of Goods Sold 17 ,400 ,000
Variable Selling Expense (30 ,000 ,000 x 20 ) 6 ,000 ,000
br 23 ,400 ,000
Contribution
6 ,600 ,000
Fixed Costs Cost of Goods Sold 2 ,800 ,000
Advertising Expense 800 ,000
Administrative Expense 3 ,200 ,000
br 6 ,800 ,000
Net Operating Loss (200 ,000 Budgeted Income Statement under marginal costing if own sales force employed
Sales
30 ,000 ,000
Variable Cost of Goods Sold 17 ,400 ,000
Variable Selling Expense (30 ,000 ,000 x 10 ) 3 ,000 ,000
br 20 ,400 ,000
Contribution
9 ,600 ,000
Fixed Costs Cost of Goods Sold 2 ,800 ,000
Advertising Expense (800 ,000 500 ,000 ) 1 ,300 ,000
Administrative Expense (note 1 ) 4 ,500 ,000
br 8 ,600 ,000
Net Operating Profit
1 ,000 ,000
Note 1 - Computation of Fixed Administrative Expenses
Present Fixed Administrative Expenses 3 ,200 ,000
Salaries of Salespeople 700 ,000
Travel and Entertainment Costs 400 ,000
Manager and Support Staff Salary 200 ,000
3 . Presently if the firm accepts the 20 commission rate a net operating loss would be incurred of 200 ,000 . Indeed a sales level of 30 ,900 ,000 is necessary . On the contrary if the own sales force is employed a lower sales level amounting to 26 ,700 ,000 is necessary . Thus the level of sales to reach the profit level under the 20 commission would be lower as follows Percentage contribution of sales : 100 - 68 32 4 . This entails the break-even point at 30 ,900 ,000 sales level for the 20 commission and 26 ,700 ,000 sales level if own sales force employed
5
MEMO
To : President
From : Management Accountant
Date : 10th June 2008
Subject : Best Option on Thermometers
In light of the income statements conducted above , the organization should refrain from allowing the further increase in commission to 20 This is due to the fact that the firm will incur net losses of 200 ,000 if this arises . If based on the estimates made the company employs its own workforce the financial performance of the firm will drastically improve . Indeed it is envisaged that the net income would increase to 1 ,000 ,000 , which is 600 ,000 higher than the present profit under the 18 commission . In this respect , the company should employ its own workforce , because it is more financially viable
Reference
Drury C (1996 . Management and Cost Accounting . Fourth Edition . New York : International Thomson Business Press
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