Cost Volume Profit Analysis 1) A new client MN Company has approached your consulting firm for help

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Cost Volume Profit Analysis

1) A new client MN Company has approached your consulting firm for help. The management of the company is contemplating a number of different options for increasing its net operating income and need your help with understanding the impact of different options on the income. The following monthly data in contribution format has been made available for the MN Company for its only product, Product SD:

The company produced and sold 300 units during the month and had no beginning or ending inventories.

Required:

1. 1. In the first option the management is contemplating the use of plastic gearing rather than metal gearing in Product SD. This change would reduce variable expenses by $18 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 250 units per month. Should this change be made?
   2. Refer to the original data. In the second option the management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50 percent. Should these changes be made?

Refer to the original data. In the third option management wants to automate a portion of the production process for Product SD. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SD thus resulting in an increase in monthly sales of 12%. Should these changes be made?

2. Cutting Edge Corp. produces sporting equipment. In 2012, the first year of operations, Cutting Edge produced 25,000 units and sold 20,000 units. The selling price was $100, variable-manufacturing costs were $40 per unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $540,000, and fixed administrative expenses were $200,000.

A. Compute the net income under variable costing.

B. Compute the net income under absorption costing

3. Define variable costing and absorption costing. Discuss at least two benefits to a manager from using variable costing instead of absorption costing for internal decision-making?