# (Solved Homework): Each question refers to the same initial data. Treat each question separately. Ignore income taxes. Assume no beginning or ending inventories. Calc…

Each question refers to the same initial data. Treat each question separately. Ignore income taxes. Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel.

Data for all questions: Tam’s Tables produces wooden kitchen and dining room tables. Their tables are sold at many local furniture stores. The cost of manufacturing and marketing their tables, at their normal factory volume of 2,000 tables per month, is shown in the table below. These tables sell for \$700 each. Tam’s Tables is making a small profit, but would prefer to increase profitability.

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(Note: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.)

 Per Unit Per Unit Unit Manufacturing Costs: Variable Materials \$ 175.00 Variable Labor \$ 125.00 Variable Overhead \$ 50.00 Fixed Overhead \$ 150.00 Total Unit Manufacturing Costs: \$ 500.00 Unit Marketing Costs: Variable Marketing Costs \$ 75.00 Fixed Marketing Costs \$ 100.00 Total Unit Marketing Costs: \$ 175.00

Question 1: What is the break-even point? A) In units? B) In sales dollars?

Question 2: A large furniture chain has offered to purchase 2,000 tables (one time for their family dinner advertising campaign) if the sales price was lowered to \$575 per table. Tam’s Tables’ maximum capacity is 3,000 units. A) Based on the cost data provided, what would be the impact of the price decrease on sales, costs, and operating income if Tam’s Tables accepted this sale? Use a contribution margin income statement to show your results. B) Do you think Tam’s Tables should accept this sale? Support your decision with evidence and analysis.

Question 3: Some of the furniture stores have been asking for granite-topped tables. Tam’s Tables would be able to produce a granite-topped table with their wooden frame and legs on their existing assembly line if they purchased a new machine to shape the granite top. This would increase fixed overhead costs by \$150,000 per month (still based on normal production volume of 2,000 units). The variable materials costs for the granite tables would also be double the cost of the variable materials for the granite tables (the granite is more expensive than the wood). Maximum production for both types of tables together would still be 3,000 units because the same assembly line would be used. The granite tables would sell for \$1,000 each. A) What would be the break-even point if Tam’s Tables only sold granite tables? (In units and sales dollars) B) Create a contribution income statement for a month in which Tam’s Tables sold 1,000 wooden tables, and 1,500 granite tables. C) Explain, in your own words, how the changes to fixed and variable costs for the granite tables impact profitability.

Solution

1. Calculation of break-even point in units and in sales dollars:
1. In units –

Basic calculation –

Fixed cost

• Manufacturing cost 2,000 tables @\$150 =\$300,000
• Marketing cost   2,000 tables @ \$100 = \$200,000
• Total                                                                     \$500,000

Fixed cost would remain constant for any level of activity, but the per unit fixed cost would vary with different level of activity. Hence, fixed cost is calculated for normal capacity for all calculations.

1. Break-even point in units –

Break-even point in units = Fixed cost/contribution margin

Contribution margin = unit sales price – unit variable cost

Unit sales price per table = \$700

Unit variable cost –

Variable materials =\$175

Variable labor          \$125

Variable marketing \$75

Total                         \$425

Contribution margin =\$700 -\$425 =\$275

Break-even point in units = \$500,000/\$275 =1,818 tables

1. Break-even point in sales dollars –

Break-even point in dollars = fixed cost/ contribution margin ratio

Fixed cost \$500,000

Contribution margin ratio = (Contribution margin/selling price) x 100

= (\$275/\$700) x 100 = 39.3%

1. Evaluation of One-time order for 2,000 tables @ \$575 per table:

The basis for accepting or rejecting the order would be the contribution margin.

Contribution margin at the special selling price of \$575 –

Selling price   \$575

Variable cost \$425 (as calculated above in 1a.)

Contribution margin =\$150

The special selling price of \$575 per table earns a contribution margin of \$150 per table.

If the acceptance of the order would result in a contribution margin the order can be accepted as the company is not working at its full capacity of 3,000 tables per month.

Since the normal capacity is 2,000 tables per month, the acceptance of the order would allow the company to use its idle capacity of 1,000 tables per month (3,000 -2,000).

Assuming Tam’s Tables accepts the special order,

The company would sell 2,000 tables @\$575 per table to the special order

And 1,000 tables @\$700 per table in regular market

The income statement is shown below –

Contribution margin – 2,000 tables @ \$150 per table =\$300,000

Contribution margin – 1,000 tables @ \$275 per table =\$275,000

Total contribution                                                            \$575,000

Less: opportunity cost of 1,000 tables (\$275 -\$150)       \$125,000

\$450,000

Fixed cost                                                                         \$500,000

Net Income/(loss)                                                             (\$50,000)

The acceptance of the special order would result in a net loss of \$50,000 to the company.

Acceptance of the order, though results in employing the excess capacity of 1,000 tables per month, the company would risk losing the normal sales. As the company would be able to manufacture and sell only 1,000 tables for the normal capacity.

Since the order replaces regular business by up to 1,000 tables, the opportunity cost of accepting the special order would be the loss of contribution margin of \$125 (\$275 -\$150) on 1,000 tables sold in regular market, which equals to 1,000 x \$125 =\$125,000.

Hence acceptance of the special order would result in a loss of \$50,000. The decision is reject the special order.

3.

a. Calculation of break-even point in units if Tam’s Tables sells only granite tables:

Break-even point in units = fixed cost/contribution margin

Fixed cost = \$500,000 + \$150,000 (additional for shaping granite top)

Total fixed cost =\$650,000

Contribution margin = selling price – variable cost

Selling per unit of granite table   \$1,000

Variable cost –

Variable material \$350 (double the original cost for granite)

Variable labor    \$125

Variable marketing \$75

Total                    \$600

Contribution margin \$400

Break-even point in units = \$650,000/\$400 =1,625 granite topped tables

Break-even point in sales dollars = fixed cost/contribution margin ratio

Fixed cost =\$650,000

Contribution margin ratio = (contribution margin/selling price) x 100

= (\$400/1,000) x 100 = 40%

Break-even point in dollars sales =\$650,000/40% =\$1,625,000

b.Contribution margin income statement for 1,000 wooden tables and 1,500 granite tables:

sales

– 1,000 wooden tables @\$700 per table =\$700,000

-1,500 granite tables @1,000 per table   = \$1,500,000

Total sales                                                                                    \$2,200,000

Variable cost –

1,000 wooden tables @ \$425 =\$425,000

1,500 granite tables @\$600 = \$900,000

Total variable cost                                                                              \$1,325,000

Contribution                                                                                       \$875,000

Total Fixed cost                                                                                  \$650,000

Net Income                                                                                         \$225,000

1. Impact on Profitability

The manufacture and sale of granite tables involves an additional fixed cost of \$150,000 and an increase in unit variable material cost of \$175.

Also, the granite table sells at \$1,000 per table, reflecting a higher price compared to the selling price of wooden table, \$700.

The increase in selling price of \$300 and the incremental variable cost of \$175 result in

Incremental Contribution margin \$125 per table

Since the company sells 1,500 granite tables, the incremental contribution =\$187,500

So, the sale of granite tables resulted in an incremental profit of                            \$37,500

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