Author Question: Lima Company received a bill for an expense, 620 . Lima Company will record a(n) a. increase to ... (Read 513 times)

Zoey63294 · **on:** Jul 6, 2018

Lima Company received a bill for an expense, 620 . Lima Company will record a(n)
a. increase to cash.
b. increase to accounts payable.
c. decrease to expenses.
d. decrease to cash.

Question 2

CVP analysis, income taxes, sensitivity.

(CMA, adapted) Carlisle Engine Company manufactures and sells diesel engines for use in small farming equipment. For its 2014 budget, Carlisle Engine Company estimates the following:

Selling price 4,000
Variable cost per engine 1,000
Annual fixed costs 4,800,000
Net income 1,200,000
Income tax rate 20

The first-quarter income statement, as of March 31, reported that sales were not meeting expectations. During the first quarter, only 400 units had been sold at the current price of 4,000. The income statement showed that variable and fixed costs were as planned, which meant that the 2014 annual net income projection would not be met unless management took action. A management committee was formed and presented the following mutually exclusive alternatives to the president:

a. Reduce the selling price by 15. The sales organization forecasts that at this significantly reduced price, 2,100 units can be sold during the remainder of the year. Total fixed costs and variable cost per unit will stay as budgeted.
b. Lower variable cost per unit by 300 through the use of less-expensive direct materials. The selling price will also be reduced by 400, and sales of 1,750 units are expected for the remainder of the year.
c. Reduce fixed costs by 10 and lower the selling price by 30. Variable cost per unit will be unchanged. Sales of 2,200 units are expected for the remainder of the year.

Required:
1. If no changes are made to the selling price or cost structure, determine the number of units that Carlisle Engine Company must sell (a) to break even and (b) to achieve its net income objective.
2. Determine which alternative Carlisle Engine should select to achieve its net income objective. Show your calculations.

alexisweber49 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

B

Answer to Question 2

1a.To breakeven, Carlisle Engine Company must sell 1,200 units. This amount represents the point where revenues equal total costs.
Let Q denote the quantity of engines sold.
Revenue = Variable costs + Fixed costs
4,000Q = 1000Q + 4,800,000
3,000Q = 4,800,000
Q = 1,600 units
Breakeven can also be calculated using contribution margin per unit.
Contribution margin per unit = Selling price Variable cost per unit = 4,000 1,000 = 3,000
Breakeven = Fixed Costs Contribution margin per unit
= 4,800,000 3,000
= 1,600 units

1b. To achieve its net income objective, Carlisle Engine Company must sell 2,100 units. This amount represents the point where revenues equal total costs plus the corresponding operating income objective to achieve net income of 1,200,000.

Revenue = Variable costs + Fixed costs + Net income (1 Tax rate)
4,000Q = 1,000Q + 4,800,000 + 1,200,000 (1 0.20)
4,000Q = 1,000Q + 4,800,000 + 1,500,000
Q = 2,100 units

2. None of the alternatives will help Carlisle Engineering achieve its net income objective of 1,200,000. Alternative b, where variable costs are reduced by 300 and selling price is reduced by 400 resulting in 1,750 additional units being sold through the end of the year, yields the highest net income of 1,180,000. Carlisle's managers should examine how to modify Alternative b to further increase net income. For example, could variable costs be decreased by more than 300 per unit or selling prices decreased by less than 400? Calculations for the three alternatives are shown below.

Alternative a
Revenues = (4,000 400) + (3,400a 2,100) = 8,740,000
Variable costs = 1,000 2,500b = 2,500,000
Operating income = 8,740,000 2,500,000 4,800,000 = 1,440,000
Net income = 1,440,000 (1 0.20) = 1,152,000
a4,000 (4,000 0.15) ; b400 units + 2,100 units.

Alternative b
Revenues = (4,000 400) + (3,600a 1,750) = 7,900,000
Variable costs = (1,000 400) + (700b 1,750) = 1,625,000
Operating income = 7,900,000 1,625,000 4,800,000 = 1,475,000
Net income = 1,475,000 (1 0.20) = 1,180,000
a4,000 400 ; b1,000 300.

Alternative c
Revenues = (4,000 400) + (2,800a 2,200) = 7,760,000
Variable costs = 1,000 2,600b = 2,600,000
Operating income = 7,760,000 2,600,000 4,320,000c = 840,000
Net income = 840,000 (1 0.20) = 672,000
a4,000 (4,000 0.30); b400 units + 2,200nits; c4,800,000 (4,800,000 0.10)