ACC 550 Hampshire Company Case Study

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.
1. Compute net income before tax.
2. Compute the unit contribution margin in dollars and the contribution margin ratio for one
umbrella.
3. 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.
4. Calculate the margin of safety:
a. In units
b. In sales dollars
c. As a percentage
5. Calculate the degree of operating leverage.
6. 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.
7. 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.
8. 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.