Shaw Landscapes (SL) develops and sells plans for various types of gardens and outdoor spaces. Customers use the plans to install various landscape features such as gardens, ponds, walls, etc. The operating budget for 2023 called for 3,000 units to be produced and sold.
Budgeted Income per unit – FY2023
Revenue
$2,400
Direct Labor (13 hrs @ $50 per hr)
$650
Variable overhead (production)
$225
Fixed overhead (production)
$300
Gross Margin
$1,225
Marketing and administrative costs (all fixed)
$750
Operating Income per unit before taxes
$475
Tax Expense @ 21%
$99.75
Operating Income per unit after taxes
$375.25
What are the expected total fixed costs for the year?
If SL achieves its budget, what is the expected total profit this year after taxes?
What is the break even number of plans based on current costs?
In preparing the budget for FY2024, SL is considering a price increase of 5% per unit. No changes in either variable costs per unit or total fixed costs are anticipated from the FY2023 budget presented above. Management does believe that the price increase would decrease the total number of plans sold to 2,800 units. Calculate the net change in total after tax operating profit under the two scenarios. Present your answer as the budgeted after tax operating profit in FY2024 less the budgeted after tax operating profit in FY2023.
SL has budgeted to sell 3,000 plans in FY2023 but has production capacity of 3,300 plans per year. SL’s marketing head, Brittany, believes SL could sell a total of 3,550 plans if they were willing to more aggressively pursue leads in neighboring states. If there are no changes in either total fixed costs or per unit variable costs, what would be the total opportunity cost associated with the current capacity constraint if Brittany is correct about the total demand for SL’s product? Ignore taxes in your calculation of opportunity cost.
SL’s architects rely upon 3D modeling software in its plan production. SL’s current software is fully depreciated but costs SL $300,000 a year to have an IT consulting company, Gardner Tech, handle the required technical support. These costs are included in the Fixed Overhead costs for production. A newer 3D modeling program from LandSoft Inc. is available and costs $375,000 per year for both licenses and support. SL expects the LandSoft program would result in first year training costs of $150,000. Once the staff is trained, the new software is expected to improve SL’s work flow and reduce direct labor hours by 10% per plan.
If SL expects FY2024 sales to be 3,300 plans what is the total net benefit or (cost) of adopting the new software for FY2024? Present your answer as the budgeted before tax operating income in FY2024 using the LandSoft software less the budgeted before tax operating income in FY2024 using the current software.
SL’s architects rely upon 3D modeling software in its plan production. SL’s current software is fully depreciated but costs SL $300,000 a year to have an IT consulting company, Gardner Tech, handle the required technical support. These costs are included in the Fixed Overhead costs for production. A newer 3D modeling program from LandSoft Inc. is available and costs $375,000 per year for both licenses and support. SL expects the LandSoft program would result in first year training costs of $150,000. Once the staff is trained, the new software is expected to improve SL’s work flow and reduce direct labor hours by 10% per plan.
With its current modeling program SL is limited to 3,300 plans per year. The new program should increase annual capacity to 3,600 units per year. If SL expects FY2024 demand to be 3,500 plans what is the increase or decrease in operating income before taxes if SL adopts the LandSoft program. You may ignore both taxes and first year training costs. A positive number should indicate the new program increases profitability relative to the current program.
Shaw Landscapes (SL) specializes in developing and selling plans for various garden and outdoor space projects. To make informed financial decisions, we will assess SL’s budgeted income per unit for 2023, calculate expected fixed costs, profit, breakeven points, and evaluate the potential impact of price increases and adopting new software in FY2024.
Fixed costs remain constant regardless of the level of production. In FY2023, SL’s budgeted income statement reveals that their fixed costs consist of marketing and administrative costs, totaling $750 per unit. To determine the expected total fixed costs for the year, we multiply this figure by the budgeted production of 3,000 units.
Expected Total Fixed Costs for FY2023 = $750 per unit * 3,000 units = $2,250,000
To calculate the expected total profit in FY2023 after taxes, we will consider the operating income per unit after taxes. Given that each unit generates an operating income of $375.25, we can find the total profit for the year by multiplying this amount by the budgeted production.
Expected Total Profit in FY2023 = $375.25 per unit * 3,000 units = $1,125,750
Breakeven occurs when total revenue equals total costs, meaning no profit is generated. To calculate the breakeven number of plans, we divide the total fixed costs by the gross margin per unit.
Breakeven Number of Plans = Total Fixed Costs / Gross Margin per Unit Breakeven Number of Plans = $2,250,000 / ($2,400 – $650 – $225 – $300) = 1,000 plans
If SL increases the price per unit by 5% in FY2024 while keeping all other factors constant, we can calculate the net change in total after-tax operating profit by comparing FY2024 to FY2023.
Net Change in Total After-Tax Operating Profit = (Price Increase per Unit * Production in FY2024) – (Production in FY2023 * Operating Income per Unit after Taxes in FY2023)
Net Change in Total After-Tax Operating Profit = (1.05 * $2,400 * 2,800) – ($2,400 * 3,000) = $1,680,000 – $7,200,000 = -$5,520,000
The net change is a reduction in profit of $5,520,000 if the price increase leads to a decrease in production as expected.
In FY2024, if SL anticipates sales of 3,300 plans and adopts the LandSoft software, we can calculate the net benefit or cost by comparing the budgeted before-tax operating income for both scenarios.
With Current Software: Operating Income before Taxes = (Revenue – Direct Labor – Variable Overhead – Fixed Overhead – Marketing and Administrative Costs per Unit) * Production in FY2024
With LandSoft Software: Operating Income before Taxes = [(1.05 * $2,400) – (0.9 * $650) – $225 – $375,000] * 3,600 units
The positive difference between the two scenarios indicates the benefit of adopting the LandSoft software.
If SL expects FY2024 demand to be 3,500 plans and adopts the LandSoft software, we need to calculate the change in operating income before taxes compared to the current software scenario.
Operating Income before Taxes with Current Software = (Revenue – Direct Labor – Variable Overhead – Fixed Overhead – Marketing and Administrative Costs per Unit) * Production in FY2024 (limited to 3,300 units)
Operating Income before Taxes with LandSoft Software = [(1.05 * $2,400) – (0.9 * $650) – $225 – $375,000] * 3,600 units
The positive difference between the two scenarios indicates the impact of adopting the LandSoft software on operating income.
Shaw Landscapes’ financial decisions for FY2023 and FY2024 involve calculating fixed costs, profit, breakeven points, and assessing the impact of price increases and software adoption. These analyses provide crucial insights into SL’s financial performance and future planning.
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