ACCOUNTING 203
(chapter 5,6,7)

In my opinion, it will be a mistake if the new plant is
built, said Steven Webber, controller of Tanka Toys. Why, if that plant was
in existence right now, we would be reporting a loss of $100,000 for the year
2014 rather than a profit, and 2014 sales have been the best in the history of
the company.
Mr. Webber was speaking of a new, automated production
facility that Tanka Toys is considering building. The company was organized
only seven years ago, but it is growing rapidly due to its innovative new toys.
Annual sales since inception of the company, along with net income as a
percentage of sales, are presented below:

Year

Sales

Income as a percent of sales

2008

$
800,000

7.4

2009

1,900,000

7.0

2010

2,600,000

6.1

2011

3,000,000

5.3

2012

2,400,000

1.2

2013

3,700,000

3.8

2014

4,000,000

3.0

Although the company has always been profitable, in recent
years rising costs have cut into its profit margins. The main production plant
was constructed in 2007, but growth has been greater than anyone anticipated,
making it necessary to rent additional production and storage space in various
locations around the country. This spreading out of production facilities has
caused costs to rise, particularly since the company is somewhat limited in the
amount of automated equipment that it can use and therefore must rely on
training a large number of new workers each year during peak production
seasons.
Tanka Toys produces about 75 percent of its toys between
April and September and only about 25 percent during the remainder of the year.
This seasonal production pattern is followed by many toy manufacturers, since
it saves on storage costs and reduces the chances of toy obsolescence due to
style changes. Other toy manufacturers produce evenly during the year, thereby
maintaining a stable work force. Carrie Russell, manufacturing vice-president
of Tanka Toys, is pushing the new plant very hard, since it would permit Tanka
toys to produce on a more even basis, as well as to automate many hand
operations and thereby dramatically reduce variable costs.
Tankas management recognizes that much of the companys
success is due to the creative efforts of Kayla Dernier, head of the companys
new products department. Kayla has developed new toys that have revolutionized
some areas of the toy market. Her talents are now becoming recognized by
competitors, and Tankas management is concerned that one of the competitors
may be successful in buying her away from the company.
Although total toy sales are quite stable, individual toy
manufacturers can experience wide fluctuations from year to year according to
how well their toys are received by the market. For example, Tanka Toys missed
the market on one of its toy lines in 2012, causing a 20 percent drop in sales
and a sharp drop in profits, as shown above. Other manufacturers have
experienced even sharper drops in sales, some on a prolonged basis, and Tanka
Toys feels fortunate in the sales stability that it has enjoyed.
Mr. Webber points out that although variable costs will be
reduced by the new plant, fixed costs will rise steeply, to $1,700,000 per
year. On the other hand, fixed costs are now $450,000 per year. Mr. Webber is
confident (and Ms. Russell agrees) that with stringent cost controls variable
expenses can be held to 82 percent of sales if the company continues with it
present production setup. Variable expenses will be 60 percent of sales if the
new plant is built.
Ms. Russell points out that marketing projections predict
only a 10 percent annual growth rate in sales if the company continues with its
present production setup, whereas sales growth is expected to be as much as 15
percent annually if the new plant is built. The new plant would provide ample
capacity to meet projected sales needs for many years into the future.
Economies of expansion dictate, however, that any expansion undertaken be made
in one step, since expansion by stages is too costly to be a feasible
alternative.
REQUIRED:
1.
Assuming that the company continues with its
present production setup:
a.
Compute the break-even point in sales dollars
(2.5 pts.)
b.
Prepare a contribution format Income
Statement for each of the next three
years (2015 2017) using projected sales as follows (these figures assume a 10
percent growth rate in sales each year):
(5 pts.)

Year

Sales

2015

$ 4,400,000

2016

4,840,000

2017

5,324,000

Assume that cost behavior patterns remain stable over the
three-year period.
c.
Refer to the computations in (b) above. Compute
the operating leverage and the margin of safety percentage for each year. (2.5 pts.)

2.
Assuming that the company builds the new plant,
redo the computations in (1)(a), (1)(b), and (1)(c) above. Use projected sales
as follows (these figures assume a 15 percent growth rate in sales each year): (10 pts.)

Year

Sales

2015

$ 4,600,000

2016

5,290,000

2017

6,083,500

3.
Refer to the original data. Assume that Tanka
Toys misses the market with its toy lines in 2015 and that sales fall by 20
percent to only $3,200,000 for the year. Compute the net profit or loss for the
year with or without the new plant. (5
pts.)

4.
Refer to the original data. Suppose that the
company is anxious to earn a target profit of at least 12 percent on sales.

a.
At what sales level will the 12 percent target
profit on sales be achieved if the new plant is built? According to the
companys projected sales growth, in what year will this sales level be
reached? (2.5 pts.)
b.
At what sales level will the 12 percent target
profit on sales be achieved if the company keeps its old plant? How long does
it appear that it will take the company to reach this sales level? (2.5 pts.)

ACCOUNTING 203
(chapter 5,6,7)In my opinion, it will be a mistake if the new plant is
built, said Steven Webber, controller of Tanka Toys. Why, if that plant was
in existence right now, we would be reporting a loss of $100,000 for the year
2014 rather than a profit, and 2014 sales have been the best in the history of
the company.Mr. Webber was speaking of a new, automated production
facility that Tanka Toys is considering building. The company was organized
only seven years ago, but it is growing rapidly due to its innovative new toys.
Annual sales since inception of the company, along with net income as a
percentage of sales, are presented below:YearSalesIncome as a percent of sales2008$
800,0007.420091,900,0007.020102,600,0006.120113,000,0005.320122,400,0001.220133,700,0003.820144,000,0003.0Although the company has always been profitable, in recent
years rising costs have cut into its profit margins. The main production plant
was constructed in 2007, but growth has been greater than anyone anticipated,
making it necessary to rent additional production and storage space in various
locations around the country. This spreading out of production facilities has
caused costs to rise, particularly since the company is somewhat limited in the
amount of automated equipment that it can use and therefore must rely on
training a large number of new workers each year during peak production
seasons.Tanka Toys produces about 75 percent of its toys between
April and September and only about 25 percent during the remainder of the year.
This seasonal production pattern is followed by many toy manufacturers, since
it saves on storage costs and reduces the chances of toy obsolescence due to
style changes. Other toy manufacturers produce evenly during the year, thereby
maintaining a stable work force. Carrie Russell, manufacturing vice-president
of Tanka Toys, is pushing the new plant very hard, since it would permit Tanka
toys to produce on a more even basis, as well as to automate many hand
operations and thereby dramatically reduce variable costs.Tankas management recognizes that much of the companys
success is due to the creative efforts of Kayla Dernier, head of the companys
new products department. Kayla has developed new toys that have revolutionized
some areas of the toy market. Her talents are now becoming recognized by
competitors, and Tankas management is concerned that one of the competitors
may be successful in buying her away from the company.Although total toy sales are quite stable, individual toy
manufacturers can experience wide fluctuations from year to year according to
how well their toys are received by the market. For example, Tanka Toys missed
the market on one of its toy lines in 2012, causing a 20 percent drop in sales
and a sharp drop in profits, as shown above. Other manufacturers have
experienced even sharper drops in sales, some on a prolonged basis, and Tanka
Toys feels fortunate in the sales stability that it has enjoyed.Mr. Webber points out that although variable costs will be
reduced by the new plant, fixed costs will rise steeply, to $1,700,000 per
year. On the other hand, fixed costs are now $450,000 per year. Mr. Webber is
confident (and Ms. Russell agrees) that with stringent cost controls variable
expenses can be held to 82 percent of sales if the company continues with it
present production setup. Variable expenses will be 60 percent of sales if the
new plant is built.Ms. Russell points out that marketing projections predict
only a 10 percent annual growth rate in sales if the company continues with its
present production setup, whereas sales growth is expected to be as much as 15
percent annually if the new plant is built. The new plant would provide ample
capacity to meet projected sales needs for many years into the future.
Economies of expansion dictate, however, that any expansion undertaken be made
in one step, since expansion by stages is too costly to be a feasible
alternative.REQUIRED:1.
Assuming that the company continues with its
present production setup:a.
Compute the break-even point in sales dollars
(2.5 pts.)b.
Prepare a contribution format Income
Statement for each of the next three
years (2015 2017) using projected sales as follows (these figures assume a 10
percent growth rate in sales each year):
(5 pts.)YearSales2015$ 4,400,0002016
4,840,0002017
5,324,000Assume that cost behavior patterns remain stable over the
three-year period.c.
Refer to the computations in (b) above. Compute
the operating leverage and the margin of safety percentage for each year. (2.5 pts.)2.
Assuming that the company builds the new plant,
redo the computations in (1)(a), (1)(b), and (1)(c) above. Use projected sales
as follows (these figures assume a 15 percent growth rate in sales each year): (10 pts.)YearSales2015$ 4,600,00020165,290,00020176,083,5003.
Refer to the original data. Assume that Tanka
Toys misses the market with its toy lines in 2015 and that sales fall by 20
percent to only $3,200,000 for the year. Compute the net profit or loss for the
year with or without the new plant. (5
pts.)4.
Refer to the original data. Suppose that the
company is anxious to earn a target profit of at least 12 percent on sales.a.
At what sales level will the 12 percent target
profit on sales be achieved if the new plant is built? According to the
companys projected sales growth, in what year will this sales level be
reached? (2.5 pts.)b.
At what sales level will the 12 percent target
profit on sales be achieved if the company keeps its old plant? How long does
it appear that it will take the company to reach this sales level? (2.5 pts.)