Question

. For your first assignment, management has provided the following revenue and cost information: High End Set Economical Set Sales price $3,500 per unit $1,000 per unit Labor $875 per unit $250 per unit Materials $1,400 per unit $300 per unit Direct fixed costs $25,000 per month $16,500 per month Allocated fixed costs $85,000 per month $85,000 per month They want a better understanding of their business to make budgeting and sales goals decisions and have asked you to determine their: a. Break-even quantities for each product line b. Break-even quantities to earn $500,000 per year margin on the high-end line (at the current sales price) c. Break-even quantities to earn $300,000 per year margin on the economical line (at the current sales price) They expect the product lines to fully absorb the costs allocated to them. Once you have determined these amounts, they have asked that you present the information, describe how you performed your calculations, and explain what the results mean. 2. Later, the company is considering the purchase of machinery and equipment to set up a line to produce a combination washer-dryer. They have given you the following information to analyze the project on a 5-year timeline: • Initial cash outlay is $150,000, no residual value. • Sales price is expected to be $2,250 per unit, with $595 per unit in labor expense and $795 per unit in materials. • Direct fixed costs are estimated to run $20,750 per month. • Cost of capital is 8%, and the required rate of return is 10%. • They will incur all operational costs in Year 1, though sales are expected to be 55% of break-even. • Break-even (considering only direct fixed costs) is expected to occur in Year 2. • Variable costs will increase 2% each year, starting in Year 3. • Sales are estimated to grow by 10%, 15%, and 20% for years 3 - 5. They have asked you to calculate: • the product’s contribution margin • break-even quantity • NPV • IRR Once you have determined these amounts, they have asked that you present the information, describe how you performed your calculations, and explain what the results mean. After you have completed the calculations and presented your work, management makes the investment. Explain how the project analyses do or do not support this decision. In either case, what are the factors that should have been considered in management’s decision? 3. After the combo washer-dryer has been in production for a few years, you are asked to perform another analysis. You must evaluate the performance of all three product lines as management is concerned with the viability of the washer-dryer combination product. They provide you with the latest annual information by product: High End Set Economical Set W/D Combo Total Sales $4,700,000 $4,060,000 $880,000 $9,640,000 Labor $(1,250,000) $(1,015,000) $(235,000) $(2,500,000) Materials $(1,885,000) $(1,220,000) $(315,000) $(3,420,000) Direct fixed costs $(325,000) $(220,000) $(250,000) $(795,000) Allocated fixed costs $(650,000) $(650,000) $(650,000) $(1,950,000) Net Income $590,000 $955,000 $(570,000) $975,000 You are asked to perform an analysis to determine whether to drop or keep the washer-dryer combination product and present your findings, including the steps taken to make your determination. You are also asked to evaluate if the costing methodology is appropriate and, if not, recommend alternative methods. Please describe the circumstances of the case study and make the required recommendations. Explain your approaches to the problems, perform relevant calculations and analyses, and justify your recommendations. Evaluate the results and explain what each calculated value means. Ensure your work and conclusions are thoroughly supported. Superior presentations will: • Describe the circumstances. • Perform all calculations correctly. • Articulate how the calculations were performed. • Evaluate the computations and explain their meanings. • Make recommendations, supported by well thought-out rationale and considering various factors that could impact the decisions.

Answer 1

1.

	High end set	Economical set
Sales price	3500	1000
Less: Variable costs
Labor	875	250
Materials	1400	300
Contribution per unit	1225	450

2. Break even point for high end set = Total fixed costs / Contribution per unit =  (110,000*12)/ 1225 = 1078 units (rouned off)

Break even point for economical set = Total fixed costs / Contribution per unit = (101,500*12)/ 450 = 2707 units (rouned off)

3. Break-even quantities to earn $500,000 per year margin on the high-end line = Desired profit + Fixed costs / Contribution per unit (110,000*12)+ 500,000 / 1225 = 1486 units

Break-even quantities to earn $300,000 per year margin on the high-end line = Desired profit + Fixed costs / Contribution per unit (101,500*12)+ 300,000 / 450 = 3373 units

Conclusion: The economical set is set a lower price and hence the contribution per unit is lower. However the contribution margin from this set is higher at 45% [ 450/1000] when compared to the high end set at 35% [ 1225/3500]. Since the contribution per unit is lower for the economical model but the fixed costs allocated to both models are similar , the break even units required are higher.