Question - The Blake Manufacturing Corporation manufactures and sells folding umbrellas. The corporation's condensed income statement for the year at 31 December 2011 follows:
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Sales (200,000 units)
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£1,000,000
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Cost of goods sold
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600,000
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Gross margin
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400,000
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Selling expenses
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£150,000
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Administrative expenses
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100,000
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Net profit (before income taxes)
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£150,000
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Blake's budget committee has estimated the following changes for 2012:
- 30% increase in number of units sold
- 20% increase in material cost per unit
- 15% increase in direct labor cost per unit
- 10% increase in variable indirect cost per unit
- 5% increase in indirect fixed costs
- 8% increase in selling expenses, arising solely from increased volume
- 6% increase in administrative expenses, reflecting anticipated higher wage and supply price levels
Any changes in administrative expenses caused solely by increased sales volume are considered immaterial.
Because inventory qualities remain fairly constant, the budget committee considered that for budget purposes any change in inventory valuation can be ignored. The composition of the cost of a unit of finished product during 2011 for materials, direct labor and manufacturing support, respectively, was in the ratio or 3:2:1. In 2011, £40,000 of manufacturing support was for fixed costs. No changes in production methods or credit policies were contemplated for 2012.
Review this unit's readings and the above scenario.
Blake has established a budgeted target profit of £200,000. There is a debate brewing within the management ranks of Blake regarding which strategies will put the company in best position to reach that objective. Blake CEO would like to adjust prices. The sales manager would like to focus on increasing the number of units sold while maintaining current prices. Your job is to provide an analysis aimed at helping to reach a decision.
To begin this analysis:
Compute the unit sales price at which Blake must sell its product in the current year in order to earn a budgeted target profit of £200,000.
Calculate a value in response to the following: Unhappy about the prospect of a price increase, Blake's sales manager would like data regarding the number of units that must be sold at the former price to earn the £200,000 profit.
Calculate a value in response to the following: Believing that an estimated increase in sales is overly optimistic, a company director is requesting data predicting annual profit if the selling price calculated above is adopted but the change in sales volume only amounts to a 10% increase.
Your group, attempt to come to a consensus regarding what you, as a consulting group, would recommend to the company.