2 Costvolumeprofit Analysis

Ash Fashions Company produces an outdoor jacket that sells for $126 with a

Question

2. Cost-volume-profit analysis:

Ash Fashions Company produces an outdoor jacket that sells for $126 with a

variable cost per jacket of $90 and monthly fixed overheads of $118,800. Last month, Ash Fashions made a profit of $46,620. Required

(a) Calculate how many jackets Ash Fashions sold last month.

(b) Calculate the current breakeven point based on the last month’s cost structure.

(c) Ash Fashions is now planning operations for the remainder of this year. The sales manager is proposing to increase sales by reducing the selling price to $121 per jacket and spending an additional $14,000 per month on advertising. She estimates that sales volume would increase to 5,800 jackets per month.

(i) Calculate the breakeven point in unit and monthly profit based on the sales manager’s proposal.

(ii) Evaluate the sales manager’s proposal, taking into account the expected impact on profits and on the breakeven point. State any assumptions you need to make.

(d) If the managing director of Ash Fashions were to require that the future profits per month were 15% higher than last month’s profit. Calculate how many jackets have to be sold each month

(i) Assuming that the sales manager’s proposals were adopted.

(ii) Assuming that they were not (e.g., using the price and cost information from last month).

(iii) Comment on the results.

4. Budgeting:

Fluff Industries operates in the IT industry, producing and selling computer and IT equipment. For most of its history, it has operated with a fairly authoritarian management style. This management style is reflected in the budget-setting process, whereby the accounting staff set budget targets in conjunction with the CEO, and budgets are presented to departmental managers as non-negotiable reports. Recently, there was a change of CEO, with the appointment of Ross White. White has embarked on a reorganisation aimed at a more decentralised decision-making structure. The budget-setting process is also to be conducted with a higher level of participation by departmental managers. Accounting staff have been instructed to work more closely with departmental managers on the setting of budget targets.

Required

(a) Outline the advantages of the move to a more participative-style budget process.

(b) What is the likely impact of this change on accounting staff?

Financial Accounting