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. 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.

Contribution Margin Statement                                   (IN $)
				Total at 2,000 units	Per unit
Sales			400000	400
Less: Variable Costs
Direct labour			118000
Direct Material			94000
Sales Comission			80000
Indirect Materials			6000
Admin Office Supplies			3000
Utility Factory			20000	321000	160.5
Contribution				479000	239.5
Less: Fixed Costs
Advertising			50000
Factory Supervision			40000
Property and taxes			3500
Insurance, factory			2500
Depreciation, administrative office equipment			4000
Lease Cost, factory equipment			12000
Depreciation, factory building			10000
Administration Office Salary			60000	182000	91
Operating Income				297000	148.5

2.) As calculated above in table

Total variable cost for 2000 unit is $321000

And variable cost per unit is $160.5

3.) the company has a suggestion to extend the capability by 1000 units by acquisition additional fixed charge of $5,0000 that equals to $50 per unit and therefore the contribution stands at $239.5 that is enough to hide for the extra value. Hence, the corporate ought to think about increasing the capability by acquisition additional value of $5,0000.

4.) If the company wants to sell 1 additional unit them only variable cost of $160.5 will increase,

There will be no change in the fixed cost. It will remain fixed.

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