Question

The Dial Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow: ---- Direct labor $118,000 Advertising $50,000 Factory supervision .. $40,000 Property taxes, factory building $3,500 Sales commissions $80,000 Insurance, factory $2,500 Depreciation, administrative office equipment $4,000 Lease cost, factory equipment $12,000 Indirect materials, factory. $6,000 Depreciation, factory building $10,000 Administrative office supplies (billing) $3,000 Administrative office salaries $60,000 Direct materials used (wood, bolts, etc.) $94,000 Utilities, factory ..... $20,000 The patio sets are normally sold for $400 per set. Dial can increase capacity by 1,000 units to 3,000 units but must pay $50,000 to do so. Annual cost data for the production of 2,000 sets are classified as follows: Salg Cour Dr SI11.000 SIT1,000

Answer 1

1.

	Total at 2,000 Units	Per Unit
Sales	800000	400.00
Variable Costs	321000	160.50
Contribution Margin	479000	239.50
Fixed Costs	182000	91.00
Operating Income	297000	148.50

2. No.

The fixed costs do not change for a relevant range of zero to 2,000 units since the total fixed costs are constant within a given range though the fixed cost per unit changes with volumes.

Variable cost per unit: $160.50

Total variable costs: $321000

3.

Incremental contribution margin (1000 x $239.50)	239500
Less: Incremental fixed costs	50000
Incremental profit of expanding capacity	189500

Yes, the company should pay to increase their capacity since it would result in an incremental profit of $189500.

4. The company will make on the sale of the next unit (1,001st) the contribution margin per unit which is $239.50.

If the company makes and sells one more unit, the total sales, total variable costs, total contribution margin, total operating income, per unit fixed cost and per unit operating income will change.