Water Play, Inc.

Part 1—Shark Scout Vehicle

This project’s report will be submitted in Collaboration a tool in Canvas. Each

student will be assigned to a team and then invited to join that Collaboration team; when
the Google Doc is opened in Collaboration, the report’s introduction and very first part of
question one below is provided. The team will pick up with discussion of the
manufacturing overhead and selling and general administrative expense schedules using
the example provided for the bill of materials and labor routing schedules.

1. Identify the following information about the costs in the bill of materials, labor
routing, manufacturing overhead and the selling and general administrative expense
schedules (appendices A-1 through A-4) as being product or period costs, variable or
fixed cost behaviors, and either direct or indirect costs of each vehicle as the cost
object. The selling and general administrative costs that are identified as “fixed”
costs can either be discretionary or committed for the annual budget period.
Discretionary costs are those whose amounts are fixed by management decision but
which can be eliminated or significantly reduced in the short term without doing
irreparable damage to the company’s operations. Using the fixed costs listed in the
selling and general administrative expense schedule, identify which would be
discretionary over the annual budget period and which would be committed. In your
report to management, it will be important to define each of these cost classifications
following the example provided for the bill of materials and labor routing schedules
so those without a comprehensive knowledge of accounting will understand these
terms used in the report.

2. Prepare a contribution format income statement based upon the 72,000 projected sales
units for the year. Show the contribution format income statement in total dollars for
72,000 units sold, per unit through contribution margin, and as a percentage through
contribution margin. The contribution format income statement in appendix A-7 will
use information from appendices A-1 through A-4 and A-6. From the contribution
format income statement, calculate the cost structure percentages. Determine the
break-even point in volume of units and sales dollars. Make sure you show all
calculations below the contribution format income statement. Using the contribution
income statement, compute the operating leverage ratio and margin of safety in
dollars and as a percentage of sales. Explain what each of the calculated figures
means for Water Play and analyze the level of risk this startup company faces.