Write a short memo to Bjorn Borg describing the analysis that the company should do before it makes this decision
1. McCree Corporation had a bad year in 2013, operating at a loss for the first time in its history. Thecompany’s income statement showed the following results from selling 200,000 units ofproduct: netsales $2,400,000; total costs and expenses $2,472,000; and net loss $72,000. Costs and expensesconsisted of the following.
Variable Fixed
Cost of sales $1,070,000 $416,000
Selling expenses $356,000 $325,000
Admin expenses $110,000 $195,000
Total $1,536,000 $936,000
Management is considering the following independent alternatives for 2014.
Increase unit selling price 25% with no change in costs and expenses.
Change the compensation of salespersons from fixed annual salaries totalling $170,000 to totalsalaries of $50,000 plus a 6% commission on net sales.
Purchase new high-tech factory machinery that will change the proportion between variable andfixed cost of goods sold to 40:60.
Required:
Compute the break-even point in dollars for 2013.
Compute the break-even point in dollars under each of the alternative courses of action. Whichcourse of action do you recommend?
“Break-even analysis is of limited use to management because a company cannot survive by justbreaking even.” Do you agree? Explain.
2.Easton Corporation makes two different boat anchors—a traditional fishing anchor and ahighendyacht anchor—using the same production machinery. The contribution margin of the yachtanchor is three times as high as that of the other product. The company is currently operating atfull capacity and has been doing so for nearly two years.
Bjorn Borg, the company’s CEO, wants to cut back on production of the fishing anchor so that thecompany can make more yacht anchors. He says that this is a “no-brainer” because thecontribution margin of the yacht anchor is so much higher.
Required:
Write a short memo to Bjorn Borg describing the analysis that the company should do before it
makes this decision and any other considerations that would affect the decision
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