Question

Chester has negotiated a new labor contract for the next round that will affect the cost for their product City. Labor costs will go from $2.57 to $3.07 per unit. Assume all period and variable costs as reported on Chester's Income Statement remain the same. If Chester were to pass on half the new labor costs to their customers, how many units of product City would need to be sold next round to break even on the product?

Name Primary Segment Units Sold Unit Inven tory Revision Date Age Dec.31 MTBF Pfmn Coord Size Coord Price Material Cost Labor Cost Contr. Marg. 2nd Shift & Over- time Auto mation Next Round Capacity Next Round Plant Utiliz

City Thrift 1,424 275 6/10/2023 3.7 17000 6.8 13.2 $16.00 $6.80 $2.57 38% 0% 10.0 1,600 99% Cozy Thrift 1,497 280 6/10/2023 3.6 17000 7.0 13.0 $16.00 $6.96 $2.57 37% 0% 10.0 1,750 93% Creak Core 1,406 228 12/16/2021 2.1 18000 9.9 9.5 $24.00 $9.72 $4.29 39% 32% 8.0 1,100 131% Crimp Core 1,564 221 12/18/2021 2.1 20000 10.6 10.0 $24.00 $10.36 $4.20 37% 23% 8.0 1,300 122%

Income Statement

(Product Name:) City Cozy Creak Crimp Na Na Na Na 2022 Total Common Size Sales $22,780 $23,951 $33,752 $37,538 $0 $0 $0 $0 $118,020 100.0% Variable Costs: Direct Labor $3,778 $3,981 $6,108 $6,629 $0 $0 $0 $0 $20,496 17.4% Direct Material $10,081 $10,855 $14,214 $16,808 $0 $0 $0 $0 $51,957 44.0% Inventory Carry $321 $333 $395 $397 $0 $0 $0 $0 $1,446 1.2% Total Variable $14,180 $15,169 $20,717 $23,834 $0 $0 $0 $0 $73,900 62.6% Contribution Margin $8,600 $8,781 $13,035 $13,704 $0 $0 $0 $0 $44,121 37.4% Period Costs: Depreciation $4,907 $5,367 $2,787 $3,293 $0 $0 $0 $0 $16,353 13.9% SG&A: R&D $1,000 $1,000 $0 $0 $0 $0 $0 $0 $2,000 1.7%     Promotions $1,250 $1,250 $1,250 $1,250 $0 $0 $0 $0 $5,000 4.2%     Sales $1,400 $1,400 $1,100 $1,100 $0 $0 $0 $0 $5,000 4.2%     Admin $253 $266 $375 $417 $0 $0 $0 $0 $1,311 1.1% Total Period $8,810 $9,283 $5,512 $6,060 $0 $0 $0 $0 $29,665 25.1% Net Margin ($210) ($502) $7,523 $7,644 $0 $0 $0 $0 $14,456 12.2%

Fixed Cost is same as Period Cost ?

Answer 1

Answer :

Sale Price of Product City before the  new labor contract = $ 22,780 / 1,424 units = $ 16 per unit

Variable Cost of Product City before the  new labor contract = $ 6.80 + $2.57 = $9.37 per unit

Labor costs will go from $2.57 to $3.07 per unit

Increase in Labor costs = $ 3.07 - 2.57 = $ 0.5 per unit

Pass on half the new labor costs to their customers = 0.5 / 2 = $ 0.25 per unit

New Sale Price of Product City after the  new labor contract = $16 + $0.25 = $16.25 per unit

New Variable Cost of Product City after the  new labor contract = $9.37 + $0.50 = $9.87 per unit

Contribution Margin = Sale Price of Product -  Variable Cost

= $16.25 - $9.87 = $6.38 per unit

Total Period Fixed Costs = $8,810

Break Even point = Total Period Fixed Costs / Contribution Margin

= $8,810 / $6.38 = 1,380 units

So, to break even 1,380 units of the product City would need to be sold in next round.