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Cost Volume Profit Analysis

Rusty casting makes two cast iron products: man hole covers and sewer grates.
His accountant provided a income statement but Rusty needs
more information to make some business decisions.

Using the financial data provided, please do the following:

1. Determine the expense type for each expense on Rusty's income statement (see tab ExpType)

2. Prepare an Income Statement using the Contribution Margin format separating expenses into four categories:
Direct variable product expenses
Indirect variable product expenses
Indirect fixed product expenses
Fixed General and Administrative expenses

3. Using the same format, prepare a product income statement by allocating Variable Indirects and Fixed Indirects between covers and grates. Use direct labor to allocate these expenses (see tab ByLabor).

4A. Calculate how Variable and Fixed indirects would have been allocated using revenue and using units produced (do on ByRev and ByUnits tabs). Which allocation method do you think is best?
4B. Knowing that the bonuses for the Grate Production Manager and Covers Production Manager are 5% of their product's margin, how will you justify your recommendation to them?
4C. If you decided to do multiple cost pools for indirects. What pools might you use and what expenses would they contain? What carrier would you use for each pool in order to allocate out the indirects?

5. Calculate the predetermined overhead rate if indirects are allocated using direct labor. Also, calculate the POR if using units to allocate indirects.
6. Determine the impact of the following scenarios:

6A. What is Rusty's break even in units and $?
6B. What is Rusty's margin of safety in units and $? What is his margin of safety ratio?
6C. How much would net income increase if Rusty sells 10,000 more covers?
6D. How much would net income increase if Rusty sells 10,000 more grates?
6E. Rusty has been offered an special order for 20000 more grates,
but it's at a lower price ($55.00 instead of $65.00) and he would have
to rent more factory space at a total cost of $80,000.
E1. How much would net income change if he accepted the order?
E2. What would be some reason to accept the order? Some reasons
not to accept it? What would you recommend?

(See attached file for full problem description)


Solution Preview

A. What is break even (if keep product mix constant)?


B. What was margin of safety in 2000?



C. How much would net income increase if sell 10,000 ...

Solution Summary

This explains the concepts such as break even point, contribution margin, margin of safety with the help of case study and illustrates step by step calculation.