financial performance of your division, breakeven, variances

You have been asked to attend the corporate meeting next week to discuss the performance of your division. To help you prepare for the meeting, you requested the following information from the Chief Financial Officer.

Balance Sheet: Assets 2008
Cash $14,000
Short-term investments. 71,632
Accounts receivable 878,000
Inventories 1,716,480
Total current assets $2,680,112
Gross fixed assets 1,220,000
Less: accumulated depreciation 383,160
Net fixed assets $836,840
Total assets $3,516,952

Liabilities and Equity 2008
Accounts payable $359,800
Notes payable 300,000
Accruals 380,000
Total current liabilities $1,039,800
Long-term debt 500,000
Common stock (100,000 shares) 1,680,936
Retained earnings 296,216
Total equity $1,977,152
Total liabilities and equity $3,516,592

Income Statement 2008
Sales (355,000 unit A and 364,000 unit B) $7,145,000
Cost Of Goods Sold 5,800,000
Selling and Administrative Expenses 200,000
Depreciation 120,000
Total Operating Costs $6,120,000
EBIT $1,025,000
Interest Expense 80,000
EBT $945,000
Taxes (40%) 378,000
Net Income $567,000

Other Relevant Data 2008
Stock Price $6.00
Shares Outstanding 100,000
EPS ($0.95)
DPS $0.11
Tax Rate 40%
Book Value Per Share $7.91
Lease Payments $40,000

Statement of retained earnings, 2008
Balance of retained earnings, 12/31/2007 $203,768
add: net income, 2008 567,000
less: dividend paid, 2008 ($11,000)
Balance of retained earnings, 12/31/2008 $759,768

Master Budget for 2008
Sales (350,000 units of A @ $15 and 350,000 units of B @ $5) $7,000,000
Cost of goods sold 5,810,000
Contribution margin $1,190,000
Selling and Administrative expenses 155,000
Operating income $1,035,000

Standard variable manufacturing cost per unit:
Product A Product B
Direct Materials 10 pieces @ $.50 $5.00 per unit 5 pounds @ $.30 $1.50 per unit
Direct Labor 1 hour @ $3.00 $3.00 per unit .3 hours @ $2.50 .75 per unit
Variable overhead 1 hour @ $2.00 $2.00 per unit .3 hours @ $2.50 .75 per unit
Total $10.00 per unit $3.00 per unit

Actual variable manufacturing cost:
Product A Materials $1,259,500 (5,038,000 pieces)
Labor 1,509,000 (503,000 hours)
Overhead 1,006,000 (503,000 hours)
Product B Materials 966,400 (3,020,000 pounds)
Labor 150,000 (200,000 hours)
Overhead 150,000 (200,000 hours)
Total $5,040,900

You are to write a 5 to 7 page report on the financial performance of your division and at a minimum address the following items.
1. Calculate the 2008 projected ratios (using the following ratio chart). Discuss the ratios and what they mean for your division.
2009 Industry Average
Current 2.7
Quick 1
Inventory Turnover 6.1
Debt Ratio 50.00%
Profit Margin 3.60%
ROA 9.00%
ROE 17.90%

2. Determine the company’s budgeted break-even point in dollars, contribution margin ratio and contribution margins by product.
3. Determine the sales activity variance for each product for the fiscal year end.
4. Determine and identify all variances in variable manufacturing costs by product for the fiscal year end.
5. What are some qualitative factors that should be considered when evaluating the company’s likely future financial performance?
6. Identify and strengths and/or weakness you identified in your analysis.
7. Any recommendations you feel are warranted at this time.

The difference between cost of goods sold and total standard variable manufacturing cost is the fixed manufacturing costs amount.
5,810,000 – 4,550,000 = 1,260,000
The selling and administrative expenses of 155,000 will need to be added to the 1,260,000 to arrive at the total fixed costs.

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