The objective of this homework exercise is to illustrate thecalculation and use of several important managerial issues relatingto CVP, including breakeven and indifference points, target profit,cost structure and production decisions.
No Streak, Inc. manufactures windshield wipers for its singleclient, Go Fast Motors. No Streak sells each wiper to Go Fast for$25. Direct material costs per unit equal $4 and direct labor costper unit equals $1. Also, No Streak incurs $5 of variable overheadcosts for every unit that it manufactures and sells. Finally, thefixed costs associated with No Streak’s manufacturing plant equal$20,000 and the fixed costs related to No Streak’s marketing anddistribution equal $30,000.
1. [Basic breakeven analysis.] Calculate No Streak’s breakevenpoint output volume.
2. [Profit goals and taxes.] What output volume would No Streakneed to achieve to generate a $15,000 pre-tax profit? What outputvolume would No Streak need to achieve to generate an after-taxprofit of $15,000? [No Streak’s tax rate is 40%].
3. [Changing cost structures.] No Streak realizes that itsbiggest competitor, Spot Free, manufactures its windshield wipersin an overseas production plant. Spot Free is able to producewipers at a significantly lower cost due to the lower labor cost inits overseas plant. In order to compete more effectively on costs,No Streak is considering changing its cost structure by automatinga greater portion of its manufacturing process. Specifically, NoStreak’s new cost structure would increase total fixed costs to$100,000 and reduce variable cost per unit to $5. At what level ofoutput volume would No Streak be indifferent between the currentcost structure and the proposed new cost structure? What profit isgenerated at this output volume?
4. [Changing revenue and cost structures.] Assume the sameinformation as in #3. However, Spot Free believes that in additionto the new cost structure, it will also need to lower its price perunit to $23 to remain competitive. At what level of output volumewould No Streak be indifferent between the current cost and revenuestructure and this new alternative cost and revenue structure? Whatprofit is generated at this output volume?
5. [Putting it all together.] Which cost structure should NoStreak select? What factor plays a very large role in helping toanswer this question?
6. [Multiple Product CVP.] No Streak has decided to stay withits current cost and revenue structure. Instead, No Streak haselected to add Sheer Shine, a miraculous windshield cleaningsolution, to its product mix offering. The variable cost tomanufacture and sell each bottle of Sheer Shine is $7 and eachbottle sells for $10. Additional fixed costs of $10,000 arerequired to manufacture Sheer Shine. Based on analyses ofcompetitors, No Streak estimates that it would manufacture and selltwo bottles of Sheer Shine for every three windshield wipers thatit manufactures and sells. Assuming this product mix is accurate,how many windshield wipers and bottles of Sheer Shine must NoStreak sell in order to breakeven this year?
7. [Sensitivity Analysis.] No streak defines CVP risk as thevariation (or range) in net income that would result from specificchanges in critical CVP inputs. Assume that No Streak expects tosell 6,000 Windshield Wipers and 4,000 bottles of Sheer Shine.Compute and rank in descending order of CVP risk each of thefollowing three changes in CVP inputs associated with the multipleproduct CVP analysis in requirement 6: (A) The price for eachbottle of Sheer Shine falls from $10 to $8. (B) The variableoverhead cost for each windshield wiper increases from $5 to $10.(C) The fixed marketing and distribution costs increase from$30,000 to $45,000.
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