MADIHA SHAKIL 4423 FARHEEN KARIM ALI 4104 KHADDAM AHMED 4075 ADEEBA HUSSAM 3926 HASSAN RAHIM 3932 COST AND MANAGERIAL ACCOUNTING
Nov 19, 2014
MADIHA SHAKIL 4423FARHEEN KARIM ALI 4104KHADDAM AHMED 4075ADEEBA HUSSAM 3926
HASSAN RAHIM 3932
COST AND MANAGERIAL ACCOUNTING
CASE 6-32 COST STRUCTURE; BREAKEVEN; TARGET PROFITS
INTRODUCTION
Pittman companyBudgeted income statement
For the year ended December 31
Sales $16,000,000
Manufacturing costs Variable Costs 7,200,000 Fixed overhead 2,340,000 9,540,000
Gross margin 6,460,000Selling and administrative costs:
Commissions to agents 2,400,000 Fixed marketing costs 120,000* Fixed administrative costs 1,800,000 4,320,000
Net operating income 2,140,000Less fixed interest cost 540,000Income before income taxes 1,600,000Less income taxes (30%) 480,000Net income $1,120,000
THE BREAKDOWN OF THE COMMISSIONS TO AGENTS ($2,400,000)
Restructuring Data Into Contribution Format For The 3 Alternatives
15% Commission
Sales ................................................................................................................................$16,000,000 @100% Less variable expensesManufacturing..................................................................................................................7,200,000 Commissions (15%)......................................................................................................2,400,000 Total variable expenses......................................................................................... 9,600,000 @ 60%Contribution margin…………..................................................................................6,400,000 @40% Less fixed expensesManufacturing overhead.............................................................................................2,340,000 Marketing..............................................................................................................................120,000 Administrative.................................................................................................................1,800,000 Interest…................................................................................................................................540,000 Total fixed expenses.....................................................................................4,800,000 Income before income taxes……………………………………………………………...1,600,000 Less income taxes (30%)...............................................................................................480,000 Net income …..................................................................................................1,120,000
20% Commission
Sales .....................................................................................................16,000,000 @ 100% Less variable expenses:Manufacturing......................................................................................................7,200,000 Commissions (20%) ………..............................................................................3,200,000 Total variable expenses............................................................................10,400,000 @ 65% Contribution margin.....................................................................................5,600,000 @ 35% Less fixed expenses:Manufacturing overhead..................................................................................2,340,000 Marketing................................................................................................................120,000 Administrative......................................................................................................1,800,000 Interest......................................................................................................................540,000 Total fixed expenses.......................................................................................4,800,000 Income before income taxes............................................................................ 800,000 Less income taxes (30%)...................................................................................240,000 Net income ............................................................................................................$560,000
Restructuring Data Into Contribution Format For The 3 Alternatives
Own Sales Force
Sales ................................................................................................$16,00,0000 @ 100%Less variable expenses:Manufacturing..................................................................................7,200,000Commissions 7.5% …………..........................................................1,200000Total variable expenses................................................................8,400,000 @ 52.5%Contribution margin......................................................................7,600,000 @ 47.5%Less fixed expenses:Manufacturing overhead..............................................................2,340,000Marketing.............................................................................................2,520,000 Administrative...................................................................................1,725,000 Interest......................................................................................................540,000Total fixed expenses.........................................................................7,125,000Income before income taxes............................................................475,000Less income taxes (30%)..................................................................142.500Net income ............................................................................................ 332.500
Restructuring Data Into Contribution Format For The 3 Alternatives
•Fixed marketing cost increase by 2,400,000 so fixed marketing cost become $120,000 + $2,400,000 = $2,520,000 • Fixed administrative cost decrease by 75,000 so fixes administrative cost become $1,800,000 – $75,000 = $1,725,000
1ST REQUIREMENT
Break-even Point @ 15% commission
1ST REQUIREMENT
Break-even Point @ 20% commission
1ST REQUIREMENT
Own Sales Force
2nd REQUIREMENT
3rd REQUIREMENT
4th REQUIREMENT
4th REQUIREMENT
4th REQUIREMENT
5th REQUIREMENT
Thank you