ACCOUNTING-Established in 1963 in Datura, Italy, Datura, Ltd.

QUESTION

CVP Analysis Project

Established in 1963 in Datura, Italy, Datura, Ltd., is an
international importer-exporter of pottery with distribution centers in the
United States, Europe, and Australia. The company was very successful in its
early years, but since then, its profitability has steadily declined. As a
member of a management team, you will gather
information for Datura’s next strategic planning meeting, and you have been
asked to review its most recent
contribution income statement, which appears below.

Datura, Ltd.

Contribution Income Statement

For the Year Ended December 31, 2004

Sales Revenue

€ 13,500,000

Less Variable Cost

Purchases

€ 6,000,000

Distribution

2,115,000

Sales Commissions

1,410,000

Total Variable Costs

9,525,000

Contribution Margin

€ 3,975,000

Less Fixed Cost

Distribution

€ 985,000

Selling

1,184,000

General and Administrative

871,875

Total Fixed Cost

3,040,875

Operating Income

€ 934,000

In 2004, Datura sold 15,000 sets of pottery.

Complete Part 1:

1. For
each set of pottery sold in 2004, calculate the (a) selling price, (b) variable
purchases cost, (c) variable distribution cost, (d) variable sales commission,
and (e) contribution margin.

2. Calculate
the breakeven point in units and in sales euros.

3. Historically,
Datura’s variable costs have been about 60 percent of sales. What was the ratio of variable cost to sales
in 2004? List three actions Datura could
take to correct the difference.

4. How
would fixed costs have been affected if Datura had sold only 14,000 sets of
pottery in 2004?

After you have
completed part 1 above, read the following and complete part 2.

In January 2005, Sophia Callas, the president and chief
executive officer of Datura, Ltd., conducted a strategic planning meeting. During
the meeting, Phillipe Mazzeo, vice president of distribution, noted that
because of a new contract with an international shipping line, the company’s
fixed distribution cost for 2005 would be reduced by 10 percent and its
variable distribution costs by 4 percent. Gino Roma, vice president of sales,
offered the following information:

We
plan to sell 15,000 sets of pottery again in 2005, but based on review of the
competition, we are going to lower the selling price to €890 per set. To
encourage increased sales, we will raise sales commissions to 12 percent of the
selling price.

Sophia Callas is concerned that the changes described by
Roma and Mazzeo may not improve operating income sufficiently in 2005. If
operating income does not increase by at least 10 percent, she will want to
find other ways to reduce the company’s costs. She asks you to evaluate the situation in a short
professional report. Because it is already January of 2005 and changes need
to be made quickly, she requests your report within 14 days.

Complete Part 2:

1. Prepare
a budgeted contribution income statement for 2005. Your report should show the
budgeted (estimated) operating income based on the information provided above
and in part 1. Will the changes improve operating income sufficiently? Explain

2. In
preparation for writing your report, answer the following questions:
a. Why
are you preparing the report?
b. Who
needs the report?
c. What
sources of information will you use?
d. When
is the report due?

Please
submit your responses, to both sections, in aprofessionalmanner.
(See the General Instructions document,
in Moodle, for more details).

Everything
should be typed.

I highly
encourage you to utilize Microsoft Excel (Spreadsheets)!

You may also utilize Microsoft Word.

ANSWER:

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