Project 1 - Cost Volume Profit Project
You work in the Finance division of a large recreational vehicle company that specializes in 4-wheel utility vehicles. As reward for your excellent performance, you have been assigned as Division Accountant for a new division that will be manufacturing and selling snowmobiles.
In your new position, you will have a dual reporting responsibility to both the new Snowmobile Division head as well as the Controller in the Finance Division. The Controller has requested you put together an analysis of the new product by preparing a cost-volume-profit study.
The employee information you have related to the new product in the new division includes: The Division head at a salary of $130,000.
The division has hired 2 marketing representatives at a salary of $55,000 apiece. The Division's head of manufacturing has a salary of $80,000
Your salary should be included in the division's expenses at $45,000
Information about the sales costs include
Hired 2 sales representatives at $60,000 per for base salaries. The plan is to incent the sales staff by paying a $100 commission per snow mobile sold.
The sales staff is estimating the average sales price will be $12,500 per snowmobile
Projections of manufacturing cost include
Cost of direct materials per snowmobile is $3,000 Labor time required per snowmobile is 60 hours. Average hourly labor cost is $36 / hour
Other cost of operations information you are aware of
Lease of the office space for staff is $50,000 / year and includes utilities
Lease of manufacturing space is $80,000 / year and includes utilities
You have been asked by the Controller to do the following
1. Estimate the number of snowmobiles that must be sold for the division to breakeven for the year?
2. Estimate the number of snowmobiles that must be sold in order to make a profit of $300,000?
3. An alternative is to manufacture a higher quality snowmobile that could sell for $16,000. But it requires $3,800 in direct materials and 68 hours of labor time per snowmobile. If using this alternative, how many vehicles must be sold to breakeven for the year?
4. Using the same assumptions as 3, how many must be sold to make $300,000 profit?
5. The Controller has also requested that you provide some ideas on how to make the division's cost structure more variable in case the division doesn't meet its sales projections. What advice do you have?