Solved by verified expert :CASE 2
Roxbury Manufacturing Company
by
Khursheed Omer
(Modified by Alicia A. Yancy)
Roxbury
Manufacturing Company is a privately owned business. Products manufactured by Roxbury had been
doing very well until the year 2011. The
last two years have seen a steady decline in sales and profit. If this declining trend continues, the
company might come under financial distress. Income statements for the last two
years are given below.
Year
1 Percent Year 2 Percent
Sales $
5,000,000 100 $ 4,500,000 100
Less
Variable Expenses $
3,750,000 75 $
3,375,000 75
——————————————————————–
Total
Contribution Margin $
1,250,000 25 $
1,125,000 25
Less
Fixed Expenses $
1,000,000 $
1,000,000
———————————————————————
Net Income before taxes $ 250,000 $ 125,000
==========================================
Mr. Creighton, the owner of the company
is baffled that only a ten percent decline in sales has resulted in a twenty
percent decline in profits. He asks you
to explain to him how in spite of maintaining efficiency in operations by
keeping variable expenses and contribution margin at the same percentage level,
he has experienced a greater percentage decline in profits.
