Part 1: CVP Analysis (35 points)
Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienc ed a stead y
growth in sales for the past five years. However, Ms. Luray, Eagle’s CEO, believes that to maintain the
company’s present growth will require an aggressive advertising campaign next year. To prepare for the
campaign, the company’s accountant, Mr. Bednarik, has prepared and presented to Ms. Luray the following
data for the current year, Year 1:
Variable costs:
Direct labor (per unit) $ 82
Direct materials (per unit) 37
Variable overhead (per unit) 15
unit)
Total variable costs (per $ 134
Fixed costs (annual):
Manufacturing $ 400,000
Selling 297,000
Administrativ e 795,000
Total fixed costs (annual ) $ 1,492,000
Selling price (per unit) 411
Expected sales revenues , Year 1
(22,000 units)
$ 9,042,000
Eagle has an income tax rate of 35 percent.
Ms. Luray has set the sales target for Year 2 at a level of $10,686,000 (or 26,000 radios).
Required:
(a) What is the projected after-tax operating profit for Year 1?
(b)What is the break-ev en in units and dollars for Year 1?
(c) Ms. Luray believes that to attain the sales target (26,000 radios) will require additional selling expens es
of $287,000 for advertising in Year 2, with all other costs remaining constant. What will be the after-tax
operating profit for Year 2 if the firm spends the additional $287,000?
(d)What will be the break-ev en point in sales dollars for Year 2 if the firm spends the additional $287,000
for advertising?
(e) If the firm spends the additional $287,000 for advertising in Year 2, what is the sales level in dollars
required to equal the Year 1 after-tax operating profit?
(f) At a sales level of 26,000 units, what is the maximum amount the firm can spend on advertising to
earn an after-tax operating profit of $757,000?
Part 4: Estimated Net Realizable Value and Effects of Processing Further
(30 points)
Fletcher Fabrication, Inc., produces three products by a joint production process. Raw materi als are put
into production in Department X, and at the end of processing in this department, three products appear.
Product A is sold at the split-off point with no further processing. Products B and C require further
processing before they are sold. Product B is processed in Department Y, and product C is processed in
Department Z. The company uses the estimated net realizable value method of allocating joint production
costs. Following is a summary of costs and other data for the quarter ended June 30.
No inventories were on hand at the beginning of the quarter. No raw material was on hand at June 30.
All units on hand at the end of the quarter were fully complete as to processing.
Products A B C
Pounds sold 22,000 59,000 65,000
Pounds on hand at June 30 48,000 0 36,000
Sales revenues $17,600 $73,750 $117,000
Departments X Y Z
Raw material cost $55,000 $ 0 $ 0
Direct labor cost 26,000 37,750 95,900
Manufacturing overhead 10,000 12,450 39,775
Required:
(a) Determi ne the following amounts for each product.
(1) Estimated net realizable value used for allocating joint costs.
(2) Joint costs allocated to each of the three products.
(3) Cost of goods sold.
(4) Finished goods inventory costs, June 30.
(b)Assume that the entire output of product A could be processed further at an additional cost of $1.75
per pound and then sold for $5.10 per pound. Compute the incremental income from further
processing A.
(c) Considering the results of part b, should the company process product A further? Explain.