Bill Graham and Larry Miller incorporated B&L Landscapes, Inc. on July 1, 2014. The business consists of lawn care and sprinkler system installations. In addition, they also sell two types of fertilizer.
During 2015, B&L Landscapes, Inc. acquired a 30% interest in Crestline Pipe. The president of Crestline has been expressing concern about the profitability of the company. Bill and Larry want to help and have volunteered your services to provide some managerial reporting for Crestline.
Crestline Pipe distributes high-quality ¾ inch PVC pipe that sells for $3.00 per linear foot unit. Variable costs are $1.05 per unit, and fixed costs total 27,000 per year.
Assume that the operating results for last year were:
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Sales........................................................................................................
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$60,000
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Less variable expenses........................................................................
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21,000
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Contribution margin.............................................................................
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39,000
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Less fixed expenses..............................................................................
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27,000
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Net operating income........................................................................
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$ 12,000
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Instructions:
Answer the following independent questions:
1. What is the product's contribution margin? What is the product's CM ratio?
2. Use the contribution margin to determine the break-even point in sales units (round to whole units). Use the CM ratio to determine the break-even point in sales dollars (round to whole dollars).
3. What is the margin of safety in dollars and units for Crestline Pipe?
4. Due to an increase in demand, the company estimates that sales will increase by $20,000 this year. By how much should net operating income increase (or net operating loss decrease), assuming that fixed costs do not change?
5. The president expects sales to increase by 25% this year. If sales do increase by 25%, how much could fixed costs increase and still maintain net operating income of $12,000?
6. The president would like to reduce the sales price of the pipe to $2.70 per linear foot unit and increase advertising by $3,000. Using the CM method, what is the breakeven point in units with these changes (round to whole units)? How many units would Crestline have to sell to maintain a net operating income of at least $12,000 (round to whole units)?
Prepare your answers in a memo to the President of Crestline Pipe. Be sure to show all your work and identify your calculations and your solutions clearly. Remember this report is going to a non-accountant, so be sure to include some explanation of what the numbers mean.