3. Short Term Decision Making
Rainbow Tool & Machine (RTM) in Rainbow City, Alabama has been machining precision parts, die building and servicing customers for over 30 years. It is facing a difficult time with one of its productline ‘Wire’ due to severe price competition with lot of competitors. Mr. Alex Brown, Chief Financial Officer of RTM, has prepared the following contribution format income statement for the month ended on June 30, 2022.
Particulars Per Unit ($) Total Amount ($)
Sales (20,000 units) 50 1,000,000
Variable expenses 35 700,000
Contribution Margin 15 300,000
Fixed Expenses 350,025
Net Operating Loss - 50,025
Mr. Allen Walker, President of RTM, raised his concern on the performance of ‘Wire’ product line and call for a group meeting. The meeting has made threadbare discussion on the product lines and
scrutinizes few alternative courses of actions. You are requested to consider the below situations for analysis.
The End
Required:
a) [2 Marks] Mr. Alex Brown needs to appraise the meeting about the current situation of ‘Wire’ product line. To support Alex, calculate
i) Break-Even Point in units and sales dollar
ii) Target units for making $50,475 profit
iii) CM ratio. If sales increase by $100,000; how much NOI will increase if costs remain same. Use
incremental method.
b) [1 Mark] Do you think that Alex should do the analysis based on traditional income statement to
improve the situation? Justify.
c) [1 Mark] Ms. Linda Talwar, marketing director, proposes a fancy package with an additional cost of $1 per unit along with $27,975 increase in monthly salary of sales executive will increase unit
sales by 10,000 units. Comment on this proposal.
d) [2 Marks] Mr. Allen Walker proposes to increase the selling price rather increasing costs. He wants
0.4 as CM ratio. What should be the revised selling price?
e) [2 Marks] Mr. Anil Dastugir, Finance Director, argues that neither increasing selling price nor increasing salary will work in this situation. RTM should think about automating certain part of ‘Wire’ production by spending $49,975 month on fixed cost which will slash variable costs by $15.
i) Calculate BEP in units and sales dollar
ii) Should Mr. Allen Walker accept this proposal? Please justify.
f) [2 Marks] RTM has another product line ‘Tool & Die’ which is much profitable generating 60%
contribution margin. RTM is going to participate in a trade show and plans to offer a ‘Premium
Package’ to attract potential customer. Ms. Linda Talwar wants to put more ‘Wire’ products into
the package it generates less contribution margin (only 30%). However, Mr. Anil Dastugir wants
to put more products from ‘Tool & Die’. Alex has also supported Anil. Put your opinion in this
regard.