Question

You are an eager and ambitious young graduate of the Reginal F. Lewis College of Business at Virginia State University with a new Accounting degree and a great life ahead of you. One of your closest friends is an inventor and an entrepreneur who wants to start a business selling a break-through new drywall screw that he has invented and that he believes works much better than the drywall screws currently on the market. He wants to start the business by opening a factory to produce the screws which can then be sold to either wholesalers or retailers who will then sell them to the general public. After searching all over creation for the right sized building in the perfect location to properly meet the needs of his target customers, he found that the ideal building in which to put up his factory was right here in Petersburg all along To begin, he was able to purchase the building he needed outright for $525,000. Useful life of the building is 40 years and it is depreciated on a straight-line basis. Estimated salvage value is $25,000. Property taxes on the building each year are $4,000. There is a new machine that another fellow VSU grad has invented that takes the metal for the screws and molds them into their proper size and shape, and takes the plastic for the anchors and molds them into their proper size and shape; an assembly line is attached to the machine where workers put the screws and anchors into boxes. The finished product is a box of 32 drywall screws and their plastic anchors that work unlike any that have come before them. He purchased this machine outright for $185,000. The machine has a useful life of 25 years with no residual value and is depreciated on a straight-line basis. The machine can produce 25,000 boxes of screws and anchors per year. He is sure that he can sell every unit produced. etermined that to produce the 32 screws in each box will require 112 ounces of metal which is the only material used to make the screws and to produce the 32 anchors in each box will take 48 ounces of plastic which is the only material used to make the anchors. The metal you need is produced by multiple suppliers and you've found one so far that will allow you to buy it at $1.50 per pound. The plastic used is also produced by multiple suppliers and you've found one so far that will allow you to buy it at $. 15 per

Answer 1

1) Direct materials cost per box: $10.95

Metal ($1.50 x 112/16)	10.50
Plastic ($0.15 x 48/16)	0.45
Cost per box $	10.95

Note: 1 pound = 16 ounces

2) Direct labor cost per box = $16 x 15/60 = $4

3) Variable cost per box = Direct material cost + Direct labor cost = $10.95 + $4 = $14.95

4) Contribution margin per box = Sales price - Variable cost = $23.75 - $14.95 = $8.80

5) Total fixed costs: $133900

Salary-VP	55000
Salary-COO	55000
Depreciation-building*	12500
Depreciation-equipment**	7400
Property taxes	4000
Total fixed costs $	133900

*Depreciation-building = ($525000 - $25000)/40 = $12500

**Depreciation-equipment = $185000/25 = $7400

6) Break-even point in boxes = Total fixed costs/Contribution margin per box = $133900/$8.80 = 15215.91 = 15216