Excel Applications for Accounting Principles
4th Edition
ISBN: 9781111581565
Author: Gaylord N. Smith
Publisher: Cengage Learning
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Textbook Question
Chapter 18, Problem 4R
The president of Poleski would like to know the effect that each of the following suggestions for improving performance would have on contribution margin per unit, sales needed to break even, and projected net income for next year. Each change should be considered independently. Reset the Data Section to its original values after each suggestion is analyzed. Fill in the table following the suggestions with the results of your analysis.
- a. The president suggests cutting the productʼs price. Since the market is relatively sensitive to price, “. . . a 10% cut in price ought to generate a 30% increase in sales (to 156,000 units). How can you lose?”
- b. The sales manager feels that putting all sales personnel on straight commission would help. This would eliminate $77,000 in fixed sales salaries expense. Variable sales commissions would increase to $2.00 per unit. This move would also increase sales volume by 30%.
- c. Poleskiʼs head of product engineering wants to redesign the package for the product. This will cut $1.00 per unit from direct materials and $0.50 per unit from direct labor, but will increase fixed factory
overhead by $100,000 for additional depreciation on the new packaging machine. The package redesign would not affect sales volume. - d. The firmʼs consumer marketing manager suggests undertaking a new advertising campaign on Facebook. This would cost $30,000 more than is currently planned for advertising but would be expected to increase sales volume by 30%.
- e. The production superintendent suggests raising quality and raising price. This will increase direct materials by $1.00 per unit, direct labor by $0.50 per unit, and fixed factory overhead by $110,000. With improved quality, “. . . raise the price to $18.50 and advertise the heck out of it. If you double your current planned advertising, Iʼll bet you can increase your sales volume by 30%.”
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The Miramar Company is going to introduce one of three new products: a widget, a hummer, or a nimnot. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes, as shown in the following payoff table: a. Compute the expected value for each decision and select the best one. b. Develop the opportunity loss table and compute the expected opportunity loss for each product. c. Determine how much the firm would be willing to pay to a market research firm to gain better information about future market conditions.
We can get a sense of how model output responds to changes in inputs from sensitivity analyses. Some argue that we might draw very different conclusions when using different boundaries, especially when model output is a non-linear function of inputs. For example, we compute the net present value (NPV) of a business with a 10% discount rate. We can choose +/- 1% for our sensitivity analysis, or +/-5% for our analysis. For this reason, some argue that one can manipulate sensitivity analysis to support one’s prior. What do you think of this comment?
Maximus Steel plans to introduce one of three new products code-named: Wren, Hawk, and Nightingale. The marketing department indicated that the success of any product depends on the market conditions (Favorable, Neutral, or Unfavorable). The profit the company will earn also depends on the market conditions.
The table below shows the probability estimated for each market condition and the profits Maximus Steel will realize within those conditions:
Product Code
Market Conditions
Favorable
P = 0.2
Neutral
P = 0.7
Unfavorable
P = 0.1
Wren
$120,000
$70,000
($30,000)
Hawk
$60,000
$40,000
$20,000
Nightingale
$35,000
$30,000
$30,000
Part 1 Instructions:
Compute the expected value for each alternative. What is the best option for the company?
Chapter 18 Solutions
Excel Applications for Accounting Principles
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