Baby Boom, Inc.
You are a new graduate from Morgan State University, and you just got the job of a lifetime at the New York office of Baby Boom, Inc., one of the giants manufacturing firms in North America, which bottles and distributes baby food. Yesterday, the management accountant (your immediate supervisor), Bridgette Trainor, set up an appointment for you to meet with her today. You could not sleep last night because you have been concerned about your first ever job assignment at Baby Boom, Inc. You certainly would like to make a good first impression as a recent graduate and do your best efforts to retain your dream job in the Big Apple. You then have decided to review the materials you have covered in ACCT 202 from chapter 19 to chapter 24. A glance at the cost accounting materials listed in the Principles of Accounting II course did boost your confidence and reenergize your enthusiasm to work on meeting or exceeding Mr. Trainor's expectations.
Ms. Trainor then welcomed you and discussed with you your new job's duties and responsibility. You noticed that your job duties include doing some financial as well as managerial accounting functions, which involve preparing cost-volume- analysis report, detailed financial statements analysis by the end of each year, and providing recommendations on the firm's solvency, liquidity and profitability. Ms. Trainor then presented to you some information about production and sales figures and asked you to prepare a detailed report to help her in planning the target level of profitability and assess the current financial figures of the firm. Baby Boom Inc. bottles and distributes Kido, a baby food formula. The bottle is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 79 cents per bottle. For the year 2015, Ms. Trainor estimates the following revenues and costs for year 2016.
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Budgeted estimates for 2016
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Net sales
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$1,795,800
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Direct materials
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$442,166
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Direct labor
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$356,420
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Manufacturing overhead-variable
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$315,490
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Manufacturing overhead-fixed
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$280,930
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Selling expenses-variable
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$66,150
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Selling expenses-fixed
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$68,940
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Administrative expenses-variable
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$22,960
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Administrative expenses-fixed
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$45,355
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Below are financial data ofBaby Boom Inc.andHappy Feet, Inc., for the current year 2015 (in millions).
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Baby Boom Inc.
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Happy Feet, Inc., Inc.
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Income Statement Data
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Net sales
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$61,471
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$374,526
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Cost of goods sold
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41,895
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286,515
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Selling and administrative expenses
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16,200
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70,847
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Interest expense
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647
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1,798
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Other income (expense)
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1,896
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4,273
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Income tax expense
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1,776
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6,908
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Net income
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$ 2,849
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$ 12,731
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Balance Sheet Data
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Current assets
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$18,906
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$ 47,585
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Noncurrent assets
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25,654
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115,929
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Total assets
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$44,560
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$163,514
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Current liabilities
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$11,782
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$ 58,454
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Long-term debt
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17,471
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40,452
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Total stockholders' equity
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15,307
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64,608
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Total liabilities and stockholders' equity
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$44,560
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$163,514
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Beginning-of-Year Balances
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Total assets
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$37,349
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$151,587
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Total stockholders' equity
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15,633
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61,573
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Current liabilities
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11,117
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52,148
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Total liabilities
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21,716
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90,014
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Other Data
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Average net receivables
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$ 7,124
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$ 3,247
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Average inventory
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6,517
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34,433
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Net cash provided by operating activities
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4,125
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20,354
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Instruction:
a. Prepare the Cost-Volume-Profit income statement for 2012 based on Ms. Trainor's estimates.
b. Compute the break-even point in (1) units and (2) dollars.
c. Compute the contribution margin ratio and the margin of safety ratio. Give Ms. Trainor some advice on how to use these ratios in cost management planning.
d. Mr. Trainor told you that the top management aspires to achieve net income of $237,400 next year. Based on this information, what are the sales dollars required to earn the target net income?
e. Calculate the financial ratios of solvency, profitability and liquidity and give recommendations to Ms. Trainor about the current financial ratios of Baby Boom Inc. compared to its rival firm, Happy Feet, Inc.