CASE STUDY NO.

3
WHITNEY COMPANY
Presented by: Group 1
Amas, Mayette
Montaño, Rogen Kirt
Pablito, Laiza Grace
Tinaco, Hannah
Regalado, Angel
The most recent income statement for
Whitney Company appears below:
Whitney Company
Income Statement
For the year ended December 31
All variable expenses in the company vary in terms of units sold,
except for sales commissions. which are based on sales dollars.
Variable manufacturing overhead is 30 cents per unit. There were
no beginning or ending inventories. Whitney Company's plant has
a capacity of 75,000 units per year.

The company has been operating at a loss for several years.

Management is studying several possible courses of action to
determine what should be done to make next year profitable.
I. BRIEF BACKGROUND OF THE CASE
The Whitney Company, a well-established business, has been
grappling with persistent financial losses in recent years. To address
this ongoing problem, the company's management, including key
figures like the vice president and sales managers, has put forward
two distinct recommendations to the president, both of which are
currently under consideration. Firstly, the vice president suggests a
20% reduction in the selling price as a means to optimize the plant's
production capacity. In contrast, the sales manager proposes a
different approach, advocating for a 20% increase in the unit price, a
raise in sales commissions to 9%, and a $100,000 boost in advertising
expenditure. This strategy is anticipated to result in a one-third
increase in sales volume.
However, the president holds a differing perspective, deeming a change in
the selling price as an ill-advised move. Instead, they favor a cost-cutting
strategy involving the utilization of more affordable raw materials, which
would lead to a reduction of 70 cents in the unit price. Additionally, the
board has expressed dissatisfaction with the company's promotional
efforts, indicating a need for improvement in this area. Furthermore, an
opportunity has arisen in the form of an overseas dealer who has
contacted the company, seeking a special price for the purchase of 9,500
units. While this presents a potential avenue for increased profits, the
company is cautious due to its recent history of consecutive losses, which
makes it challenging to accommodate the dealer's requests. The Whitney
Company finds itself at a crossroads, faced with complex decisions as it
navigates these recommendations and opportunities while addressing its
ongoing financial struggles.
II. STATEMENT OF THE PROBLEM
Whitney Company has been consistently operating at a
loss for several years, with a net operating loss of
$(19,000) for the year ended. Management is faced with
the challenge of determining the most appropriate
course of action to turn the company's financial
performance around and achieve profitability in the
coming year.
III. SOLUTIONS Whitney Company
Income Statement
REQUIRED: For the year ended December 31

1. Redo Whitney Company's

income statement in the
contribution format. Show
both a Total column and a
Per Unit column on your
statement.
2. The president is considering two proposals prepared by members of his staff:
a. For next year, the vice president would like to reduce the unit selling price by 20%. She is certain that
this would fill the plant to capacity.
Whitney Company
Income Statement
For the year ended December 31
B. For next year, the sales manager would like to increase the
unit selling price by 20%, increase the sales commission to 9%
of sales, and increase advertising by $100,000. Based on
marketing studies, he is confident this would increase unit
sales by one-third.

Prepare two contribution income statements, one showing

what profits would be under the vice president's proposal and
one showing what profits would be under the sales manager's
proposal. On each statement, include both Total and Per Unit
columns (do not show per unit data for the fixed costs).
 Whitney Company
Income Statement
For the year ended December 31
3. Refer to the original data. The president believes it would be a mistake to
change the unit selling price. Instead, he wants to use less costly raw
materials, thereby reducing unit costs by 70 cents. How many units would
have to be sold next year to earn a target profit of $30,200?

Selling Price/unit $10.00

Original VC/unit (No.1) $4.80
Less: Reduction .70 4.1
New CM/unit $5.90

Fixed Expenses $253,000

Add: Desired Profit 30,200
Total $283,200
Divide: New CM/unit 5.90

No. of Units to achieve desired profit 48,000

To achieve a desired profit of $30,200 after reducing the
cost of raw materials and the same fixed expense of
$253,000, approximately 48,000 units must be sold.

Proof:
Sales (48,000 x 10) $480,000
Variable Cost (48,000 x 4.10) (196,800)
Contribution Margin $283,200
Fixed Cost (253,000)
Net Operating Income $30,200
4. Refer to the original data. Whitney Company's board of directors believes
that the company's problem lies in inadequate promotion. By how much
can advertising be increased and still allow the company to earn a target
profit of 4.5% on sales of 60,000 units?

Sales (60,000 x 10) $600,000

Variable cost (4.80 x 60,000) (288,000)
Contribution Margin generated $312,000
(60,000 units x $5.20 per unit)
Less: Fixed cost to be covered (253,000)
Advertising (SQUEEZE) 32,000
Target profit
$27,000
(60,000 units x $10 per x 4.5%)
5. Refer to the original data. The company has been approached by
an overseas distributor who wants to purchase 9,500 units on a
special price basis. There would be no sales commission on these
units. However, shipping costs would be increased by 50% and
variable administrative costs would be reduced by 25%. In addition,
a $5,700 special insurance fee would have to be paid by Whitney
Company to protect the goods in transit. What unit price would have
to be quoted on the 9,500 units by Whitney Company to allow the
company to earn a profit of $14,250 on total operations? Regular
business would not be affected by this special order.
The quoted price unit would be:
Variable production expense ($2 + $1.74 + $0.30) $4.04
Shipping expense ($0.12 x 1.5) 0.18
Variable administrative expense ($0.04 x 0.75) 0.03
Special insurance fee ($5,700/9,500 units) 0.60
Present net operating loss ($19,000/9,500 units) 2.00
Desired profit ($14,250/9,500 units)
1.50
Quoted price per unit $8.35
Supporting Computation with Target Profit:

Sales (9,500 x 8.35) $79,325

Less: Variable Expenses
COGS (9,500 x $4.04) $38,380
Shipping Expense (0.18 x 9,500) 1,710
Variable Administrative Expense 285 40,375
l (0.03 x 9,500)
Contribution Margin $38,950
Less: Insurance Expense 5,700
Profit from One Time Order $33,250
Less: Current Cost 19,000

Desired Overall Profit $14,250

Supporting Computation at Break-Even:

Sales (9,500 x 4.85) $46,075

Less: Variable Expenses
COGS (9,500 x $4.04) $38,380
Shipping Expense (0.18 x 9,500) 1,710
Variable Administrative Expense (0.03 x 9,500) 285 40,375
Contribution Margin
Less: Insurance Expense $5,700
Profit from One Time Order 5,700
Less: Current Cost $ 0
19,000
Current Loss after the order
($19,000)
CONCLUSION AND RECOMMENDATION
Whitney Company is facing ongoing financial losses
and has received several proposals to address the
issue. The vice president suggests a 20% price cut, but
this would still result in a small loss. The sales manager
proposes increasing the price by 20%, raising sales
commissions, and spending $100,000 on advertising,
which could generate a $50,200 profit. The president
recommends cutting production costs by $0.70 per unit.
Additionally, an overseas order could bring in $14,250 in
profit.
It is recommended to follow the sales manager's plan
to raise prices and boost advertising for better
profitability, while also adopting the president's cost-
cutting strategy. Accepting the special order would
further help reduce losses. Strengthening promotions
and using a contribution margin income statement
will support better decision-making and help the
company recover financially.