Making Decisions: Linear Profit Model for Given Questions (Other (Not Listed) Sample)

Making Decisions with Linear Profit Model
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Making Decisions with Linear Profit Model
Part 1: Baker Consolidated
The linear profit modeling defines that:
C (x) = mx + b
Total costs = variable costs + fixed costs
In calculating the monthly operating income change for Baker Consolidated, the following should be considered:
Cafeteria
Fixed costs- $4700
Variable costs – 40/100 x 12000 = $4800
Total sales – $12000
Contribution Margin = Total Sales- Variable costs
12000- 4800 =$ 7200
Net Operating Income = contribution margin- fixed costs
7200 – 4700 = $2500
 As such, changing to vending machines leads to an increase in sales of about 40% of current sales. This means an increase of:
40/100 x 12000 =$ 4800 increase
The vending machine will, therefore, lead to sales of
12000 + 4800 = $16800
Baker Consolidated would receive 16% of the spending which leads to income of
16/100 x 16800 = $2688
As such, the net operating income increases by
$2688 - $2500 = $188
The result is a percentage of
188/2500 x 100 = 7.52%
The calculations reveal that Bank Consolidated would have a 7.52% increase in the monthly operating income if they convert to vending machines. The decision is viable as the revenue realized will increase while cutting all the costs associated with operating the cafeteria.
The decision causes minimal changes in the behavior of the customers as they expressed no concern during the recent poll. As a responsibility of the company, it is important to consider the reactions of the employees to the changes. Also, the sales are estimated to increase showing that the customers are more satisfied with the services due to increased availability. The recommendation is that Baker Consolidated managers take up the decision of adapting the vending machines instead of the cafeteria system. The company will have increased the income of 7.52% while still having no operating costs. Additionally, the decision provides a source of income for the vending machine operators. The decision is, therefore, more economic value than running a cafeteria.
Part 2: Barnwell Brothers Company
Break –even point = Fixed costs (Sales – Variable Costs)
= 110,000 (5.0 – 3.5)
= 73,333 units
The results show that when Barnwell Brothers sells 73,333 units, the total revenue is equivalent to the total costs of production. It indicates that the company is not experiencing any losses or profit.
After-tax profit = Operating income x (1 – tax rate)
$90000 = (operating income x0. 6)
Operating income = 90000/0.6 = 150,000
Sales = operating income + total costs
Sales = 150,000 + 455000
= $605,000
Number of units = sales / cost per unit
= 605,000/5
= 241,000 units.
The company has to sell 241,000 units to attain profit after tax of $90000.
An increase in the fixed costs leads to a change in the break-even analysis as follows
Break-even point = Fixed costs (Sales – Variable Costs)
= 110000 + 31500 (5.0 – 3.5)
= 94, 333 units
The result shows that an increase in the fixed costs in the company either in the form of rent or manger’s salary will lead to an increase in break-even point units.
Break-even point analysis is crucial for Barnwell Brothers as it indicates the point at which the sales are equal to the expenses. The company can use the break –even point to understand the profitability of a certain product line in the business. Also, it indicates the point at which the company begins making losses. The company will, therefore, make the necessary adjustments to avoid losses for the business. This includes ways of increasing the price of goods to make up for an addition in the fixed costs (Banker, Byzalov, Ciftci & Mashruwala, 2014). Additionally, it may involve increasing sales to cover for the extra fixed operating expenses.
The calculation of after-tax profit informs the underlying performance of the business. It indicates the position of the company compared to its competitors and informs any business investment decisions (Weygandt, Kimmel & Kieso, 2015). The stakeholders of the business are interested in after-tax profits as it indicates the conversion of the revenues to profits. The shareholders are most likely to consider the after-tax profits before making any investment decisions in the Barnwell Brothers.
Lastly, alteration of the fixed costs has an impact on the break-even point. The calculation is relevant to the company in determining the best way to recover for added fixed expenses. The decisions may involve an increase in the unit price of the goods or a consequent promotion of the goods to increase the volume of sales.
Several recommendations for reduction of costs at Barnwell Brothers are available. One would involve a decrease of the direct labor. The employees at the factory could be reduced by automating some of the functions and decreasing part-time employees. The outcome would be maintained operations with less money going into labor. A reduction of direct labor, a variable cost, would lead to a decrease in the contribution margin that would ultimately result in increased operating income for the company. This can be shown by the liner profit model below:
Operating Income = (Sales – Variable Expenses) – Fixed Costs (Weygandt, Kimmel & Kieso, 2015)
Another recommendation would be to consider alternative and...