Mini-Case 12-1: Bowden Brake Service (Part A)

question 71

Essay

Mini-Case 12-1: Bowden Brake Service (Part A)
Jim Bowden, owner of Bowden Brake Service, is planning to expand his six-year-old brake service to include tune-ups and tire services. Based on budget estimates for the upcoming year, Jim expects net sales to be $825,000 with a cost of goods sold of $530,000 and total operating expenses of $210,000. From the budget he created, Jim computes fixed expenses to be $168,000, while variable expenses (including cost of goods sold)are $572,000. Jim is concerned that the new cost structure may damage his ability to produce a profit and he wants to perform a break-even analysis for the upcoming year to gain insight.
-If Jim were to reduce his fixed costs by 10 percent by reducing a middle management position, what benefit would that be to him and the company? What would his new contribution margin be?

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Definitions:

Current Liabilities

Current liabilities are a company's debts or obligations that are due within one year.

Liquidity

Refers to how quickly an asset can be converted to cash. Liquid assets can be converted to cash quickly, whereas illiquid assets cannot.

Operating Cycle

The period of time it takes for a business to purchase inventory, sell products, and receive cash from sales.

Average Payment Period

The average amount of time it takes a company to pay off its accounts payable.