Determine the contribution margin, Financial Accounting

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You were recently hired by E&T Boats, Inc. to assist the company with its financial planning and to evaluate the company's performance.  E&T Boats, Inc. builds and sells boats to order, which they can build in less than five weeks from start to finish.   E&T sell fivedifferenttypes of boats ranging in price and cost. 

You have been given the following financial information for E&T Boats, Inc.:

E&T Boats, Inc.

                                                2011 Income Statement 

Sales                                        $13,780,000

Cost of goods sold                       8,080,000

Other expenses                           1,540,000

Depreciation                                   440,000

Interest                                       231,500

Net income                              $3,488,500

E&T Boats, Inc.

 2011 Balance Statement 

Asset:                                                                           Liabilities and Equity

Current assets                                                               Current Liabilities

   Cash                                    $  254,000                      Accounts Payable                     $   595,000

   Accounts Receivable                425,000                        Notes Payable                             1,000,000

   Inventory                                 475,000                    Total current liabilities               $1,595,000

Total current assets                   1,154,000

                                                                                  Long-term debt                           $2,500,000

Fixed assets                                                                  Shareholder equity

     Net plant and equipment      $6,025,000                     Common stock                          $  100,000

                                                                                  Retained Earnings                    2,984,000

                                                                                Total Equity                              $3,084,000

Total assets                              $7,179,000                    Total liabilities and equity       $7,179,000

The following additional information was also given to you:

  • Average inventory $ 382,000
  • Average total assets $7,075,000
  • Average shareholder's equity $3,005,000

E&T is highly automated and use the most current computerized equipment to help them built each boat.  Due to the specialized equipment used in each boat, a variety of the products used to manufacture the boats are produced from outside companies.  Production costs are variable and can be traced to each boat.  In addition to the variable costs, management estimates $500,000 of fixed costs would be associated with the production of all of the boats manufactured in 2011. 

Below is data regarding the sales for E&T Boats, Inc for2011:

Product

1

2

3

4

5

Sales volume (000's)

125

100

35

76

14

Unit Selling Price

$25,000

$40,000

$75,000

$30,000

$125,000

Unit Variable Cost

$15,000

$21,250

$50,000

$15,000

$85,000

Required:

You are to write a 5 to 7 page report, excluding attachments, on the financial performance of E&T Boats, Inc. Your report should be done in a business memo format using APA style as applicable. You must cite all sources used in APA style.  All internet sites used should be cited and included as a reference.  

Make sure you include all of your calculations and support all of your answers based on the knowledge you have obtained throughout the course.  Your calculations should be included as an attachment and not included in the body of the paper.  If you did not do the calculations yourself and used a website or other tool, this should be cited and included as one of your references. 

Your report must include at a minimum the following items.

1.         Calculate the following ratios based on the 2011 financial statement: 

  • Current ratio
  • Quick ratio
  • Total asset turnover ratio
  • Inventory turnover ratio
  • Total debt ratio
  • Debt-equity ratio
  • Profit margin
  • Return on assets
  • Return on equity

2.   Compare the performance of E&T to the industry ratios below and identify differences between the ratios of E&T and the industry averages.  Explain the possible reason why the ratio may be higher or lower than the industry average. Identify and discuss all areas of concern based on your comparison.  You need to also includeany actions management needs to take to bring the ratios of E&T more in line with the industry averages.

 Industry Average Ratios for 2011

Current ratio

1.43

Quick ratio

  .38

Total asset turnover ratio

  .85

Inventory turnover ratio

1.36

Total debt ratio

  .52

Debt-equity ratio

1.25

Profit margin

1.98

Return on assets

1.50

Return on Equity

2.25

3.   E&T has been considering adding one additional boat to their production line to reach a different clientele.  Unfortunately, they only have enough room to build a total of five boats; therefore, if they choose to add an additional boat they will need to discontinue manufacturing one of their current boats.  The projections for the new boat are as follows:

  • Projected sales: 50 per year
  • Unit selling price: $20,000
  • Unit variable cost: $10,000

Should E&T add the additional boat to their production line?  If so, which boat should be discontinued? For this requirement you must review each boat independently to determine the financial impact if the proposed boat is added to the production line and one of the other boats are eliminated.  To accomplish this you need to complete at a minimum the following:

  • Determine the contribution margin for each boat.
  • Determine a method to allocate fixed costs and determine the profitability by boat. Make sure you disclose the method you use to allocate fixed costs.
  • Determine the breakeven point for each boat.
  • Non-financial factors that should be considered in this decision.
  • Make your recommendation based on your calculations.

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