MODULE 3: Profit decisions are important to the Martins

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MODULE 3:

Profit decisions are important to the Martins. These decisions not only arise from understanding the market, pricing policies and margins the managers need to understand the tools and elements they need to consider as they target either profit levels or their ability to manage the elements of the profit calculation. For example, if CompuTech is operating at a loss or below BREAK EVEN then understanding how they might be able to manage costs, or volumes to generate profits becomes very important. BREAKEVEN analysis can help the Martins and CompuTech decide on any of the following: how many units they need to sell, what price should they sell at (and compared to what the market will bear), what levels their fixed costs are at, what product or service should a company promote more or less.

Assuming the following: (i) the sales price for each CompuTech product sold is $50; (ii) each product sold costs $25 in Raw Material components; and the business Fixed Cost is as determined in your Income Statement.

Q1: What is the BE in units for CompuTech in 2021?

Q2: What impact would occur to the BE if the variable cost of materials rose by 10% during the year?

Q3: If the overall market for computer products in CompuTech's market area is 3,000 units what share of the market does its BE (Q1) represent? What share of the market does CompuTech's unit sales in 2021 represent?

Q4: If CompuTech were to hire a Sheridan student (annual cost for Part Time service $20,000 per year) to help in the marketing of CompuTech, what would the impact be on the company's BE?

Q5: If the Sheridan student could impact unit sales by 20% growth, would their hiring be justified? Explain.

Q6: With the following information for 2022 prepare a pro-forma Income Statement for the year ending December 31, 2022, and then, calculate CompuTech's (a) income before taxes, (b) contribution margin and (c) PV ratio.

RM Purchases: $205,000

Freight In: 4,000

Sales Salaries: 60,000

Commissions: 3,000

Travel: 3,000

Advertising: 5,000

Admin Salaries: 38,000

Revenue: 420,000

Depreciation: 40,000

Office leasing: 7,000

Finance Costs: 14,000

Income Taxes: 13,000

Q7: Assuming that the price per unit and the variable cost per unit have stayed the same as in calculations for 2021, what is the new BE in units for CompuTech in 2022? How does this compare to the BE in units for the previous year?

Q8: If the total market in the CompuTech market area had experienced a shrinking in units during the year (of 10%) should the Martins be concerned? Explain.

By 2023 the Martins are projecting considerable improvement in their business. Using the following accounts make an Income Statement for the period ending December 31, 2022.

RM Purchases: $406,000

Sales Salaries: 80,000

Commissions: 5,000

Travel: 5,000

Advertising: 10,000

Depreciation: 80,000

Admin Salaries: 60,000

Office Leasing: 10,000

Finance Costs: 30,000

Income Taxes: 42,000