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 Advertising Factory supervision. Property taxes, factory building Sales commissions. Insurance, factory Depreciation, administrative office equipment Lease cost, factory equipment Indirect materials, factory ... Depreciation, factory building Administrative office supplies (billing) Administrative office salaries ... Direct materials used (wood, bolts, etc.) Utilities, factory .. $118,000 $50,000 $40,000 $3,500 $80,000 $2,500 $4,000 $12,000 $6,000 $10,000 $3,000 $60,000 $94,000 $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:

1. Please prepare a contribution margin income statement at normal capacity and label the income statement as Figure 1. Please show the following format and show columns for totals and per unit. Assume that sales are priced at the normal price.

2. Do total fixed costs change for a relevant range of zero to 2,000 units? Why or why not?

What is the variable cost per unit and what are the total variable costs for 2,000 units?

Please explain your calculations and reference to the chart in Figure 1.

3. If demand for 2020 is instead 3,000 units should the company pay to increase their capacity? Why? Please explain your calculations and reference to the chart in Figure 1. Assume units are sold at the normal price.

Hint: If you expand capacity, you will have to pay additional fixed costs of $50,000. Remember that fixed costs are fixed within the relevant range. If you expand capacity then you are outside this range. If you expand capacity then you can make revenue on 1,000 additional units at the normal price and would pay variable costs on 1,000 additional units. Please consider the incremental profit or loss of expanding capacity. If the incremental profit of expanding capacity is positive then you should do so.

4. Assume sales and demand are 1,000 units, how much will the company make on the sale of the next unit (1,001^st)? Discuss which amounts on the income statement will change if the company makes and sells one more unit. Please discuss your calculations and reference to Figure 1.

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, fixed costs do not change for a relevant range of zero to 2,000 units.

The total fixed costs are constant within a given range however the fixed cost per unit changes.

Variable cost per unit: $160.50

Total variable costs: $321000

3.

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

Yes, the company should pay to increase their capacity since it would result in an increase in profits by $189500.

4. The amount the company will make on the sale of the next unit (1,001st) is 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.