Assignment: Cost Volume Profit Analysis

Scenario
Mirabel Manufacturing is a small but growing company that manufactures and sells marine sonar
equipment. They employee a national sales force and their primary customers are marine retailers
and boat dealerships. The company has expanded over the last 5 years and Paul Mirabel, the
founder and CEO has become concerned that he no longer has a clear picture of their cost
structure. He calls his CFO, Mary Jane Montgomery in for a meeting.
“Mary Jane, I am concerned that I am not current on our cost structure and how that is impacting
our bottom line,” Paul begins.
“Well, Paul, the company has grown considerably over the past 5 years, so I’m not surprised that
you feel a little disconnected with how things are going,” Mary Jane replied. She continued “In fact,
I’ve been meaning to talk to you about a couple of big items such as increasing the sales
commission to 15%. We’ve lost two of our best account managers in the last 9 months. It seems
like we are behind the curve paying only 12% on gross sales.”
“What do you mean we are behind the curve,” Paul replied angrily. “We have always been the
leader in every aspect of our business.”
“Well, that may have been the case in the past, Paul, but frankly we need to step up our
compensation package to stay competitive,” Mary Jane replied. She continued, “And that’s not
everything. I met with Frank Jacobs from marketing and he said we need to have a bigger presence
at the trade show in March. He told me he would need about $650,000 added to the marketing
budget to support new marketing materials.”
“Come on, Mary Jane, how can we do that when we are going to have to increase commission?” He
continued, “I spoke with Dan Clark in production and he indicated that we have two pieces of
equipment that need to be replaced by the end of the quarter and that’s going to set us back
almost $1.2 million.”
Mary Jane shook her head. “Paul, I hate to bring this up but while we are talking costs, but Bob in
purchasing stopped by the office and dropped off some revised cost information – it looks like
several of our suppliers are talking about significant price increases by the end of the year.”
Paul slumped in his chair. “This is a mess, Mary Jane. Increasing commissions, new equipment,
materials price increases and marketing expenses all at once. Even if Frank Mallow is correct that
we should see a 10% increase in sales for the coming year, I just don’t see how we can make this
work. We have to maintain enough profit to keep the shareholders happy and I can’t sleep when
we dip below that $2 million margin of safety.”
Mary Jane gathered up her papers. “Before you get too distressed, let me put together some figures
and let’s see what this looks like on paper. I’ll get back to you by the end of the week. In the
meantime, stay positive, we’ll find the best solution.”
The following income and cost data for Mirabel is provided:

Assignment: Cost Volume Profit Analysis by Linda Williams in Accounting for Managers by Lumen Learning is licensed
under CC-BY 4.0
 Mirabel Manufacturing
Budgeted Income Statement
For the Year Ending December 31
Sales $ 36,750,000
Cost of goods sold:
Variable $ 13,300,000
Fixed $ 9,300,000
Gross Margin $ 14,150,000
Selling & Administrative
Commissions $ 4,410,000
Fixed Marketing Expenses $ 1,350,000
Fixed Administrative $ 6,000,000
Net Operating Income $ 2,390,000

Model 101 Model 201 Model 301

Normal Annual Sales Volume 16,000 19,000 11,000
Unit Selling Price $ 650 $ 750 $ 1,100
Variable expense per unit $ 250 $ 200 $ 500

Questions
(Note: Each of the following questions is independent of the others)
1. What is Mirabel’s over-all break-even point in sales dollars?
2. Assume that sales revenue remains constant, what is the impact on break-even and the
margin of safety if Paul takes Mary Jane’s advice and increases sales commission to 15%?
3. If Mirabel purchases the new equipment for $1,200,000, it will increase fixed costs by 10%
but will decrease the variable cost per unit for all 3 models by 5%. What will Mirabel’s new
break-even point be?
4. If Mirabel invests the additional $650,000 in fixed marketing expenses, sales of the Model
301 are expected to increase by 8%. What is the break-even and margin of safety under
these circumstances?
5. If the projection is that sales will increase by 10% in the coming year, can the company
afford to also increase commission from 12% to 15%? Why or why not.
6. Assume that sales volume remains fixed but there is a 5% increase in variable expenses
(materials cost) for the Model 101 and 301, and a 10% increase in variable expenses for
Model 201. What is the new break-even?

Report
Prepare a report from Mary Jane to Don explaining how these changes will affect Mirabel’s overall
cost structure. For those changes that are controllable, make a recommendation considering the
uncontrollable cost changes. Be certain to consider not only the company’s break-even point, but
also the desired margin of safety.

Assignment: Cost Volume Profit Analysis by Linda Williams in Accounting for Managers by Lumen Learning is licensed
under CC-BY 4.0