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Problem 4. CVP Analysis, cont. Part 2.

Silky Smooth lotions come in two sizes: 4-ounce and 8-ounce bottles. The accompanying Excel file summarizes the selling prices and variable costs per case of each lotion size. Fixed costs are $300,000. Current production and sales are 4,000 cases of 4-ounce bottles and 6,000 cases of 8-ounce bottles. These relative proportions of sales of the two products represent the past three years average sales for Silky Smooth, as shown in its Contribution Margin Income Statement.

REQUIRED: a. Given the current sales mix, calculate the break-even point in sales units, including the breakdown of the sales of each product.

b. Calculate the Degree of Operating Leverage (DOL) at the current sales volume and sales mix. (Use the total; dont attempt to allocate fixed costs to the two products.)

c. Using your DOL in (b), compute the operating profit that would result from a 10% increase in sales from the current sales volume with the same sales mix.

d. On you Excel spreadsheet, prepare a data table for the breakeven volume and percentage change in the breakeven point from the current level, for each 1% change in the sales mix of 4-oz & 8-oz bottles, over the range of 35/65% to 45/55%, respectively (i.e., 4-oz range is 35-45%; corresponding 8-oz range is 65-55%. - What does your analysis suggest?

e. Silky Smooths marketing director believes that by dropping the price of the 4-oz bottle from $38 to $36 (a 5.26% decrease), sales of the 4-oz bottles should increase by 15% over the current level, without impacting sales of 8-oz bottles. Project the operating profit that would result from this change.

Excel file data: Silky Smooth Lotions Per-Unit Amounts

4-oz8-oz

Sales Price 4oz $38.00 8oz $66.00 V

Variable Costs 4oz $13.00 8oz $24.50

Total Current Sales Volume (units) 4,000 (4oz) 6,000(8oz) 10,000 (total)

Current Sales Mix (4oz) 40% (8oz) 60%

Fixed Costs $300,000

Contribution Margin Income Statement,

Current Sales & Production Levels 4-oz 8-oz

Total Sales Revenues $152,000 $396,000 (TOTAL) $548,000

Variable Costs $(52,000) $(147,000) $(199,000)

Contribution Margin $100,000 $249,000 $349,000

Fixed Costs $(300,000)

Operating Income $49,000

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