MTW Corporation was formed on January 1, 2006 and has struggled financially since inception. The
Chief Financial Officer, Horace Daymond, has hired you to perform some cost-volume-profit analysis to
determine what changes can be made to increase profitability. He has provided you with the following
traditional income statement for 2016.
Total sales volume for 2016 was 25,000 units. The relevant range for MTW Corporation is 20,000 –
(1) Prepare a contribution format income statement for 2016. Calculate the break-even sales
(2) The Production Manager believes that by using a lower quality material, the cost of direct
material can be reduced by $2.00 per unit. He expects some customers will change suppliers
and sales volume will be reduced by 1%. Prepare a contribution format income statement for
this alternative. Calculate the break-even sales dollars.
(3) The Quality Control Manager does not agree with the Production Manager’s suggestion and has
a different idea. He believes that an additional piece of equipment can be purchased. The new
piece of equipment will allow the company to decrease Direct Labor to 27% of Sales. The new
piece of equipment will increase fixed costs by $150,000 per year. Prepare a contribution
format income statement for this alternative. Calculate the break-even sales dollars.
(4) The Sales Manager agrees with the Quality Control Manager, however, she also believes that
the equipment will increase productivity and that by decreasing the sales price by $50 per unit,
the company will be able to increase sales by 1.5 % over 2016 sales volume. Prepare a
contribution format income statement for this alternative. Calculate the break-even sales
(5) Prepare a memo to the Chief Financial Officer summarizing the results of your analysis. Include
specific financial information. Be sure to provide a conclusion for your analysis.
MTW Corporation Income Statement he Year Ended December 31, 20 Sales 11,250,000 Cost of goods sold: Direct labor Direct material Variable manufacturing overhead Fixed manufacturing overhead Total cost of goods sold 3,262,500 2,925,000 1,350,000 8,912,500 Gross margin 2,337,500 Operating expenses: Variable selling expenses Fixed selling expenses Fixed administrative expenses Total operating expenses 1,125,000 687,500 675,000 2,487,500 Net operating loss