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

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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 –

27,000 units.

Requirements:

(1) Prepare a contribution format income statement for 2016. Calculate the break-even sales

dollars.

(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

dollars.

(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

Expert Answer

1)
CONTRIBUTION FORMAT INCOME STATEMENT			Per Unit
Sales in units		25000
Sales revenue		11250000	450.00
Variable expenses:
Direct labor	3262500		130.50
Direct material	2925000		117.00
Variable manufacturing overhead	1350000		54.00
Variable selling expenses	1125000		45.00
Total variable expenses		8662500	346.50
Contribution margin		2587500	103.50
Fixed Expenses:
Manufacturing overhead	1375000
Selling expenses	687500
Administrative expenses	675000
Total fixed expenses		2737500
Net operating loss		-150000
CM ratio = Contribution margin/Sales = 2587500/11250000 =	23.00%
Break even sales in $ = Fixed cost/CM ratio =2737500/23% =	$ 11,902,174
2)
CONTRIBUTION FORMAT INCOME STATEMENT			Per Unit
Sales in units (25000*99%)		24750
Sales revenue		11137500	450.00
Variable expenses:
Direct labor	3229875		130.50
Direct material	2846250		115.00
Variable manufacturing overhead	1336500		54.00
Variable selling expenses	1113750		45.00
Total variable expenses		8526375	344.50
Contribution margin		2611125	105.50
Fixed Expenses:
Manufacturing overhead	1375000
Selling expenses	687500
Administrative expenses	675000
Total fixed expenses		2737500
Net operating loss		-126375
CM ratio = Contribution margin/Sales = 2611125/11137500 =	23.44%
Break even sales in $ = Fixed cost/CM ratio =2737500/23.44% =	$ 11,676,540
3)
CONTRIBUTION FORMAT INCOME STATEMENT			Per Unit
Sales in units		25000
Sales revenue		11250000	450.00
Variable expenses:
Direct labor	880875		35.24
Direct material	2925000		117.00
Variable manufacturing overhead	1350000		54.00
Variable selling expenses	1125000		45.00
Total variable expenses		6280875	251.24
Contribution margin		4969125	198.77
Fixed Expenses:
Manufacturing overhead	1375000
Selling expenses	687500
Administrative expenses	675000
Additional fixed expenses	150000
Total fixed expenses		2887500
Net operating income		2081625
CM ratio = Contribution margin/Sales = 4969125/11250000 =	44.17%
Break even sales in $ = Fixed cost/CM ratio =2887500/44.17% =	$ 6,537,242
4)
CONTRIBUTION FORMAT INCOME STATEMENT			Per Unit
Sales in units (25000*101.5%)		25375
Sales revenue		10150000	400.00
Variable expenses:
Direct labor	894088		35.24
Direct material	2968875		117.00
Variable manufacturing overhead	1370250		54.00
Variable selling expenses	1141875		45.00
Total variable expenses		6375088	251.24
Contribution margin		3774912	148.77
Fixed Expenses:
Manufacturing overhead	1375000
Selling expenses	687500
Administrative expenses	675000
Additional fixed expenses	150000
Total fixed expenses		2887500
Net operating income		887412
CM ratio = Contribution margin/Sales = 3774912/10150000 =	37.19%
Break even sales in $ = Fixed cost/CM ratio =2887500/37.19% =	$ 7,763,923
5) Note to CFO:
The relevant financial estimates for the suggestions advanced are tabulated below:
	Existing	PM’s suggestion	QCM’s suggestion	QCM’s suggestion with SM’s modifications
Sales units	25000	24750	25000	25375
Sales price per unit	450	450	450	400
Sales revenue	11250000	11137500	11250000	10150000
CM ratio	23.00%	23.44%	44.17%	37.19%
Net Operating income/loss	-150000	-126375	2081625	887412
BEP in $	$ 11,902,174	$ 11,676,540	$ 6,537,242	$ 7,763,923
BEP in units	26449	25948	14527	19410
Of the various suggestions, the QCM’s suggestion, without the modification suggested by SM, would result in
highest net operating income. This alternative has lowest BEP in terms of units and $; hence, would afford
maximum margin of safety.

MTW Corporation was formed on January 1, 2006 and has struggled financially since inception. The

Expert Answer

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