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Illustrative Problem 12.8. Use of CVP in Decision Making: Solution: Woodstock Campany
Illustrative Problem 12.8. Use of CVP in Decision Making: Solution: Woodstock Campany
Illustrative Problem 12.8. Use of CVP in Decision Making: Solution: Woodstock Campany
4,500,000
Materials
Labor
Variable Factory Overhead
Fixed Factory
Overhead
Gross Profit
Variable Marketing
Expenses
Fixed Marketing
Expenses
Fixed Manufacturing Expenses
Income Before Income
tax
Income Tax
Net Income
1,050,00
0
1,500,00
0
450,000
500,000
3,500,000
1,000,000
135,000
185,000
180,000
500,000
500,000
250,000
250,000
Woodstock is preparing its budget for the coming year and has made the following
projections about cost increases: materials 5%, labor 8%, and all other costs (including
fixed) 6%. Production capacity is 200,000 units.
The President has been offered various proposals by the division manager as follows:
a. Maintain the present volume and sales price.
b. Produce and sell at capacity and reduce the unit price to P28.
c. Raise the unit price to P32, spend an extra P300,000 on advertising, and produce
and sell 180,000 units.
Required: Recommend action, based on quantification of alternatives.
Solution: Woodstock Campany
(a)
Alternatives
(b)
(c)
Sales
Variable Costs
Contribution Margin
Fixed Costs
Income Before Income tax
4,500,000
3,342,600
1,157,400
916,900
240,500
5,600,000
4,456,800
1,143,200
916,900
226,300
5,760,000
4,011,120
1,748,880
1,216,900
531,980
Recommendation: Proposal (c) should be adopted because it will yield the highest
amount of profit.