In this case analysis, the main purpose is to explain that why the result based on budgeted sales data is different from the result based on the actual sales data. In order to make the explanation, I will provide the brief background in the introduction and critical issue sectors. Moreover, the quantitative and qualitative analysis will be delivered. In the quantitative analysis, I will explain the contribution-format income statement and breakeven point in sales dollars based on actual sales data in detail. Finally, I will also list few recommendations that allows the reader to select the best one fit for the Smithen Company.
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If calculate the new variable expense of Sinks, for example, use $160,000 multiply by 30% equals to $48,000. Apply the same equation to compute the variable expenses for Mirrors ($200,000 * 80% = $160,000) and Vanities ($140,000 * 55% = $77,000). After all, the total variable expense increases to $285,000. The contribution margin for each product are $112,000 (sinks), $20,000 (mirrors), $63,000 (vanities), the total contribution margin is $215,000 by add three numbers up ($112,000 + $20,000 + $63,000 = $215,000) or use the total sales minus the total variable expenses ($500,000 - $285,000 = $215,000).
The Fixed expenses are $223,600 which remain unchanged. Then, contribution margin minus fixed expenses equals the operating income or loss ($215,000 - $223,600 = -$8,600). The operating income, $36,400, turns into operating loss ($8,600). Contribution-format income statement provided in Appendices, Exhibit 1. In addition, table format income statement in Appendices, Exhibit 2 offers a clear view of total monthly income based on the actual sales data.
Break-Even Point Analysis
According to the given information, use the contribution margin method seems to be the fastest way to calculate the break-even point in units, and break-even point in sale dollars. The fixed cost is given that is $223,600. The total contribution margin ratio in Exhibit 2 is 43%. Break-even point in sales dollars equals fixed expenses divide by contribution margin ratio ($223,600 / 43% = $520,000).
In the actual sales table (Exhibit 2), obviously, the productions and sales for the three products are relatively even compare to the sales in budgeted sales table as Exhibit 3. The advantages and disadvantages for actual sales is shown below
Produce and sell multi product will increase brand reputation.
Expand customers by selling different products.
May decrease brand recognition.
Moreover, the variable expense for Mirrors are extremely high. The reasons of the high expense may be mirror requires high quality materials, or more labours than our products. Another important reason might...