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Headgear Inc Case Study

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Headgear Inc Case Study

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Evaluation of HeadGear, Inc.
Learning Team 8: Sebastiano Mangiafico, Fredy Quintero,
Zain Shahid, and Patricia Wood
University of Central Florida
ACG6425
June 28, 2012
Evaluation of HeadGear, Inc.
HeadGear, Inc is a small manufacturer of headphones for use in commercial and personal applications. In recent times, the demand for headphones has grown steadily; however, the company’s profits have grown at a slower rate. John Hurley, the chief executive officer (CEO), is concerned about the falling productivity and increasing costs. John is aware that if the profits continue to decline, the result can negatively affect the stock price of the company. A decline in stock prices will hinder the firm's ability to raise new investment capital, which is essential in the growth of the company. John made the decision to bring in a new chief operating officer (COO) with the objective of improving profitability very quickly. John incentivized the new COO with a 10% bonus if he attains the goal of profit improvement. The following is the income statement for HeadGear for the period ending 2002. HeadGear Inc.|

Income Statement for the period ending 12/31/2002|
Sales (125,000 @ $75)| | $9,375,000|
| | |
Cost of Sales:| | |
Beginning Inventory: (5,000 @ $41)| $205,000| |
Cost of Production: (120,000 @ $41)| $4,920,000| |
Goods Available: (130,000)| $5,125,000| |
Less Ending Inventory: (0 @ $41)| $0| $5,125,000|
| | |
Gross Margin| | $4,250,000|
| | |
Selling and Administrative| | |
Variable Costs: (125,000 @ $15)| $1,875,000| |
Fixed Costs| $2,400,000| $4,275,000|
| | |
Net Income| | -$25,000|
Absorption Cost Net Income
The absorption cost net income is $330,000.

Variable manufacturing costs of $25 per are applied against the actual unit sales of 140,000 which gives $3.5M variable cost of sales. Additionally the budgeted fixed manufacturing costs per unit extended to the actual units...

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