Kathleen Sebilus Inc._CVP Analysis

Kathleen Sebilus Inc. contribution format income statement for the most recent month is given below:
Sales (47,000 units) $987,000
Variable expenses 690,900
Contribution margin 296,100
Fixed expenses 236,880
Net operating income $59,220

The industry in which Kathleen Sebilus Inc. operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.

New equipment has come on the market that would allow Kathleen Sebilus Inc. to automate a portion of its operations. Variable expenses would be reduced by $6.30 per unit. However, fixed expenses would increase to a total of $532,980 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased. (Input all amounts as positive values except losses which should be indicated by minus sign. Round your Per unit answers to 2 decimal places. Omit the $ and % signs in your response.)

Present Proposed
Amount Per Unit % Amount Per Unit %
$ $ % $ $ %
$ % $ %
$ $

2. Refer to the income statements in (1) above. For both present operations and the proposed new operations, Compute:
a. The degree of operating leverage.
Present Proposed
Degree of operating leverage
b. The break-even point in dollars. (Omit the $ sign in your response.)
Present Proposed
Break-even point in dollars $ $

c. The margin of safety in both dollar and percentage terms. (Omit the $ and % signs in our response.)
Present Proposed
Margin of safety in dollars $ $
Margin of safety in percentage % %

3.Refer again to the data in (1) above. As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that ample funds are available to make the purchase.)

Stock level maintained
Cyclical movements in the economy
Reserves and surplus of the company
Performance of peers in the industry

4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Instead of paying sales commissions, which are included in variable expenses, the marketing manager suggests that salespersons be paid fixed salaries and that the company invest heavily in advertising. The marketing manager claims that this new approach would increase unit sales by 50% without any change in selling price; the company’s new monthly fixed expenses would be $296,100; and its net operating income would increase by 25%. Compute the break-even point in dollar sales for the company under the new marketing strategy. (Omit the $ sign in your response.)

New break even point in dollar sales $
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$ $

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