Im confused as to how am supposed to answer this. Please only respond to Question #2 (I put it in Italic) Introduction

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Im confused as to how am supposed to answer this. Pleaseonly respond to Question #2 (I put it in Italic)
Introduction
WaterPlay, Inc. is ready to launch the sale of the underwater vehicle,Shark Scout, developed by the company’s engineers; this is a newproduct and has no competitors at this point. The accountantshave been asked to do financial planning for the first year ofoperation. The information used in the planning has beendeveloped by marketing, engineering, production operations,procurement, human resources, accounting and managers in severalother functional areas of the company. The key information isthe forecast of product and period costs based on an estimate of72,000 units to be produced and sold.
Direction:
The first part of the analysis begins withclassifying the company’s costs as product or period, direct orindirect, and variable or fixed; selling and administrative fixedcosts are then further identified as discretionary or committedfixed costs. Next is the preparation of a contribution formatincome statement so that cost-volume-profit analysis can becompleted. Cost-volume-profit analysis will look at thecompany’s cost structure, its break-even point, margin of safetyand operating leverage; this will allow the company’s management toevaluate the company’s ability to generate profits, assess howquickly profits will increase or decrease with changes in sales,and the level of risk presented by its cost structure.
Cost Classifications and Cost-Volume-ProfitAnalysis
Thestarting point in preparing cost-volume-profit analysis is toclassify the company’s forecasted costs found on the bill ofmaterials, labor routing, manufacturing overhead and selling andadministrative expense schedules found in the appendix (appendicesA-1 through A-4).
The bill of materials, (appendix A-1) identifies thecomponent parts used in manufacturing the Shark Scout and the laborrouting schedule (appendix A-2) identifies all the labor activitiesneeded to assemble the vehicles. The costs on both these schedulesare direct, product costs which have a variable cost behavior.Direct costs are those that can be directly traced and measured ineach vehicle produced; for example, each vehicle uses two base padsas the first components in the vehicle’s assembly. Product costsare those that are incurred in the manufacture of the vehicles;product costs are all materials, labor and manufacturing overheadincurred to produce the vehicles. Variable costs are those thatremain constant on a per unit basis but increase or decrease intotal proportionately as volume of production increases ordecreases. The manufacturing overhead budget, (appendix A-3)identifies employee costs and indirect factory costs and sellingand general administrative expenses (appendix A-4) identifiesadministrative costs and selling costs. The costs on (appendix A-3)are variable and fixed (with a cost code identifying the twooverhead costs) and product costs as well. Fixed costs, also knownas indirect costs, are those that remain constant no matter how thecompany is doing. The costs on (appendix A-4) would be fixed,indirect and period costs. Period costs are costs that do notinvolve the product. The following fixed costs can be classified ascommitted costs: Fringe benefits, office supplies, depreciation ofequipment and furniture, depreciation of building, warehousing,utilities, executive salaries, executive fringe benefit, accountingand MIS, leased computer system, clerical fringe benefits,insurance, and property tax. The discretionary costs could includeadvertisement, sales manager salaries, and clerical wages. Theadvertising expense could be categorized as discretionary due tothe limited market in which the product is within. The salesmanager’s salaries as well as clerical wages could also be includedin discretionary because of how insignificant their sales managersare to operations. Research and development could be adiscretionary cost due it not being directly tied to operations.Maintenance and repairs could be a discretionary cost due to theinconsistency of the maintenance necessary foroperations.
1.Using the cost schedules provided (appendices A-1through A-4), identify the following information about the costs inthe bill of materials, labor routing, manufacturing overhead andthe selling, general and administrative expense schedules as beingproduct or period costs, variable or fixed cost behaviors, andeither direct or indirect costs of each vehicle’s production. The selling, general and administrative costs that are identifiedas “fixed” costs can either be discretionary or committed for theannual budget period. Discretionary costs are those whoseamounts are fixed by management decision but which can beeliminated or significantly reduced in the short term without doingirreparable damage to the company’s operations. Using thefixed costs listed in the selling and general administrativeexpense schedule, identify which would be discretionary over theannual budget period and which would be committed. Providewritten justification for those you believe would bediscretionary. In your report to management, it will beimportant to define each of these cost categories so those withouta comprehensive knowledge of accounting will understand these termsused in the report. Write succinctly and organize thediscussion of these various cost categories and their definitionsto minimize the amount of pages management would have to read tounderstand these cost classifications. Organize yourdiscussion by identifying the cost categories for each of the fourcost schedules; it is recommended you combine discussion of thebill of materials and labor routing schedules in a single paragraphand then discuss the manufacturing overhead and selling, generaland administrative expense schedules in individualparagraphs.
2.
A contribution format income statement based upon the72,000 projected sales units for the year has been prepared showingthe contribution format income statement in total dollars for72,000 units sold, per unit through contribution margin, and as apercentage through contribution margin (creates threecolumns). From the contribution format income statement, thecost structure percentages and the break-even point in volume ofunits and sales dollars have been computed. Discuss what thecost structure percentages, break-even point in units andbreak-even point in sales dollars means for WaterPlay.
3.
Using the contribution income statement, the operatingleverage ratio and margin of safety in dollars and as a percentageof sales have been computed. Explain what each of thosefigures shows. What do these figures disclose about theprojected profitability of Water Play and how do they relate tobreak-even analysis and risk? What comments do you have aboutthe projected financial performance of the company that you feelmanagement should be aware of?