ACC 550 Hampshire Company Case Study
Section I: Cost-Volume-Profit Analysis
The Hampshire Company manufactures umbrellas that sell for $12.50 each. In 2014, the company made and sold 60,000 umbrellas. The company had fixed manufacturing costs of $216,000. It also had fixed costs for administration of $79,525. The per-unit costs of each umbrella are as follows:
Direct Materials: $3.00
Direct Labor: $1.50
Variable Manufacturing Overhead: $0.40
Variable Selling Expenses: $1.10
Using the information above, perform a cost-volume-profit (CVP) analysis by completing the steps below. All CVP calculations should be completed in the Hampshire Company Spreadsheet. Note: The CVP analysis satisfies Part A of Section I.
- Compute net income before tax.
- Compute the unit contribution margin in dollars and the contribution margin ratio for one umbrella.
- Calculate the break-even point in units and dollars of revenue. Note: This is a required part of the CVP analysis and satisfies Part C of Section I.
- Calculate the margin of safety:
- In units
- In sales dollars
- As a percentage
- Calculate the degree of operating leverage.
- Assume that sales will increase by 20% in 2015. Calculate the percentage of before-tax income for this increase. Provide calculations to prove that your percentage increase is correct based on the operating leverage calculated in step 5.
- Compute the number of umbrellas that Hampshire is required to sell if it plans to earn $120,000 in income before taxes by using the target income formula. Proof your calculation.
- A company that specializes in tours in England has offered to purchase 5,000 umbrellas at $11 each from Hampshire. The variable selling costs of these additional units will be $1.30 as opposed to $1.10 per unit. Also, this production activity will incur another $15,000 of fixed administrative costs. Should Hampshire agree to sell these additional 5,000 umbrellas to the touring business? Provide calculations to support your decision.
Additionally, complete Parts B and D of Section I as outlined in the Final Project Guidelines and Rubric document.
Section II: Inventory Management
The information below represents the beginning and ending inventory amounts along with the production and sales for the month in umbrella units.
Beginning Inventory: 0 Umbrellas
Production: 80,000 Umbrellas
Sales: 60,000 Umbrellas
Ending Inventory: 20,000 Umbrellas
Using the information provided above and the costs and sales information provided in Section I, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section II:
- Prepare a variable costing income statement.
- Prepare an absorption costing income statement.
Additionally, complete Parts A through E of Section II as outlined in the Final Project Guidelines and Rubric document.
Section III: Benchmarking
The management of the Hampshire Company would like to implement benchmarking. Standard costs have been established and are presented below. You will want to complete a variance analysis to include efficiency and price variances for materials (cloth and handle assemblies) and labor based on the following data:
Units Produced = 80,000
Units Sold = 60,000
Direct Materials Purchased and Used
Actual square yards of cloth purchased and used: 128,000
Actual price incurred per yard: $1.25
Actual handles purchased and used: 80,808
Actual price per handle/rib/stretcher assembly: $0.99
Direct Manufacturing Labor Used
Actual direct labor hours used: 15,748
Actual price per hour: $7.62
Direct labor costs: $120,000