Cost-Volume-Profit (CVP) Analysis and Managerial Decision Making: A Case Study of Trace Company

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Cost-Volume-Profit (CVP) Analysis and Managerial Decision Making: A CaseStudy of Trace CompanyProblem 1:Trace Company is a manufacturer and has the following costs from the production and saleof 480,000 CD sets for the year ended December 31, 2010.The CD sets sell for $4.50each.The company has a 25% combined federal and state income tax rate.Trace has aplant production capacity of 600,000 CD sets.Cost Item:Total Cost:Variable Manufacturing Costs:Plastic for CD sets$43,200Wages for assembly workers$600,000Labeling$86,400Variable Selling Costs:Sales commissions$48,000Fixed Manufacturing Costs:Factory rent$100,000Factory cleaning service$75,000Factory machinery depreciation$125,000Fixed Selling & Administrative Costs:Office equipment lease$120,000Systems staff salaries$600,000Admin management salaries$300,000Required:a.Prepare an absorption (traditional) costing pre-tax income statement forTrace for the year 2010.Solution:Sales Revenue (480,000 x $4.50)$2,160,000Less: Cost of goods sold$1,029,600Gross Profit$1,130,400Less: Selling and administrative costs$1,068,000Pre-tax income$62,400Cost of goods sold =TotalVariable Manufacturing Costs + FixedManufacturing Costs= ($43,200 + $600,000 + $86,400) + ($100,000 + $75,000 + $125,000)= $1,029,600b.Prepare a variable (contribution margin) costing pre-tax income statementfor Trace for the year 2010.Solution:

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Sales Revenue (480,000 x $4.50)$2,160,000Less: Variable expenses$777,600Contribution margin$1,382,400Less: Fixed expenses$1,320,000Pre-tax income$62,400Variable expenses =TotalVariable Manufacturing Costs + Variable SellingCosts:=($43,200 + $600,000 + $86,400) + $48,000= $777,600c.Compare the pre-tax income produced in ‘a’ and ‘b’ above.Was the pre-tax income the same or different?Explain why you obtained the resultsyou did.Answer:The pre-tax income statementis sameunder boththe methods, thedifference isonly in the manner of presentation.d.Would your pre-tax income answers obtained in ‘a-b-c’ above change ifproduction had been 500,000 units instead of 480,000?Why or why not?If so, by how much would it change?Solution:a)Sales Revenue (500,000 x $4.50)$2,250,000Less: Cost of goods sold$1,029,600Gross Profit$1,220,400Less: Selling and administrative costs$1,068,000Pre-tax income$152,400Cost of goods sold =TotalVariable Manufacturing Costs + FixedManufacturing Costs= ($43,200 + $600,000 + $86,400) + ($100,000 + $75,000 + $125,000)= $1,029,600Selling and administrative costs = Fixed Selling and administrative costs +Variable Selling and administrative costs= ($120,000 + $600,000 + $300,000) + $48,000= $1,068,000b)

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