Crimicar Solution

ANSWER TO TUTORIAL CASE: Crimicar Components Inc.

Gill Leatherbarrow's report should contain schedules detailing for each option:

Options 1

(no change) 2

(+5%) 3

(+10%) 4

(+25%)

Unit selling price $ 10.00 10.00 9.50 9.00

Sales units 1,000,000 1,050,000 1,100,000 1,240,000

$ $ $ $

Total sales 10,000,000 10,500,000 10,450,000 11,160,000

Variable cost 5,000,000 5,775,000 5,225,000 5,356,800

Contribution margin 5,000,000 4,725,000 5,225,000 5,803,200

(Contribution /sales %) 50% 45% 50% 52%

Fixed costs 3,000,000 3,025,000 3,250,000 3,750,000

2,000,000 1,700,000 1,975,000 2,053,200

Contribution from top slice 10,000 (see below) 29,300

Net operating income $2,000,000 $1,700,000 $1,975,000 $2,082,500

Break-even sales value 6,000,000 6,722,222 6,500,000 7,211,538

Break-even units 600,000 672,223 684,210 801282

Break-even volume % 60.0% 64.0% 62.2% 64.6%

Variable cost/unit 5.00 5.50 4.75 4.32

Fixed cost /unit (based on actual production) 3.00 2.88 2.95 3.02

Full cost/unit 8.00 8.38 7.70 7.34

Effect of selling 10,000 units under option 4

Sales price 7.25 9.00

Variable cost/unit 4.32 4.32

Contribution/unit 2.93 4.68

Extra contribution on 10,000 units 29,300 46,800

Less: extra advertising 20,000

Extra profit – S/P at $7.25 wins! $29,300 $26,800

Option 4 produces the largest net income – just!. However, note that Option 1 would...