Question

Cal-Z Shoes produces shoes in Leon, Guanajuato, Mexico. They operate out of a 3,000 M2 facility, of which 2,000 M2 is the main production area. They have two main product lines. Their own Big Apple shoe brand, for institutional and personal use, are sold to retail outlets in Mexico and the USA and account for 40% of the company’s total production. The second product line is casual shoes for a larger shoe company that sell under that company’s brand name.

Highlights of cost information from the 2019 budget (in Mexican Pesos) includes:

Expense	Total in pesos	Expense	Total in pesos
Shop floor wages	$ 7,000,000	Variable overhead	$12,500,000
Leather	$25,000,000	Fixed overhead	$10,000,000
Other materials	$ 7,500,000	Selling & Admin – Variable	$10,000,000
Selling & Admin – Fixed	$15,000,000

• Total budgeted production and sales are based on 2,000 pairs of shoes per day for a total of 250 days.
• Shop floor workers’ wages: 80% are direct labour; the remainder are indirect costs relating to setup and batch preparation. There are 200 production workers.
• Raw materials: Leather (note 40% is scrapped due to cutting and quality).
• Average selling price is $200 pesos.
• $1.00 Mexican Pesos is worth approximately $0.068 Canadian.

Required #1 required: (clearly state any assumptions you make and show all of your work in an excel spreadsheet)

What is the total contribution margin per unit (in pesos)?
What is the CM Ratio?
What is the break even volume?
What is the margin of safety (in units)?
What is budgeted profit / loss for 2019 (in pesos)?
What is the average hourly wage (in CDN $). Assume 45 hours per week, 50 weeks.
Assume retailers take a 50% margin on sales. What is the average retail price in CDN $?
Assume the USA applies a tariff of 25% on imported shoes from Mexico. What is the average cost of this tariff per pair of shoes?
Assume overhead costs are absorbed on a per-unit basis. What is the budgeted overhead rate?
As a cost accountant, what one line item would you focus on if you were tasked with reducing production costs and why?

Bonus question: Assume the factory has unused capacity. A shoe retailer in Leon has approached you with an offer to buy 50,000 pairs of shoes at a price of $175 pesos. Should you take the offer? Why?

Answer 1

	Solution:
		Amount in pesos	Amount in pesos
	Sales in units (2000 x 250)		500000
	Sales Revenue (500000 x 200)         ( c)		100000000
	Less: Variable costs:
	Raw material	25000000
	Shop Floor wages (7000000 x 80%)	5600000
	Other materials	7500000
	Variable overhead	12500000
	Selling & administrative overheads	10000000	-60600000
	Contribution Margin (a)		39400000
	Units Sold (b)		500000
1	CM per units (a/b)		78.8
2	CM Ratio (a / c)		39.40%
	Notes:
	1) Normal loss is to be allocated to units produced. Therfore cost of scrapped
	material is included in variable costs.
	2) As nothing is specified, Other materials being indirect in nature are assumed
	to be variable costs considering them changing with the change in volume of production.
3	Break Even in units = Fixed costs / CM per unit
	= (10000000 + 15000000)/ 78.8 = 317259 units