Question

Namaste Company

The Business Situation

Namaste Company manufactures a unique yoga mat. The company began operations December 1, 2018. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is as follows.

Cost Items and Account Balances

Administrative salaries                                   $15,500

Advertising                                                      11,000

Cash, December 1                                               –0–

Depreciation on factory building                        1,500

Depreciation on office equipment                        800

Insurance on factory building                             1,500

Miscellaneous expenses—factory                      1,000

Office supplies expense                                         300

Professional fees                                                    500

Property taxes on factory building                        400

Raw materials used                                           70,000

Rent on production equipment                          6,000

Research and development                              10,000

Sales commissions                                            40,000

Utility costs—factory                                             900

Wages—factory                                                70,000

Work in process, December 1                            –0–

Work in process, December 31                          –0–

Raw materials inventory, December 1               –0–

Raw materials inventory, December 31            –0–

Raw material purchases                                   70,000

Finished goods inventory, December 1              –0–

Production and Sales Data

Number of mats produced                             10,000

Expected sales in units for December

($40 unit sales price)                                       8,000

Expected sales in units for January                 10,000

Desired ending inventory                               20% of next month’s sales

Direct materials per finished unit                   1 kilogram

Direct materials cost                                       $7 per kilogram

Direct labor hours per unit                             .35

Direct labor hourly rate                                  $20

Cash Flow Data

Cash collections from customers: 75% in month of sale and 25% the following month.

Cash payments to suppliers: 75% in month of purchase and 25% the following month.

Income tax rate: 45%.

Cost of proposed production equipment: $720,000.

Manufacturing overhead and selling and administrative costs are paid as incurred.

Desired ending cash balance: $30,000.

1. Calculate the break-even point in units and in sales dollars.

2. Determine the cash payback period on the proposed production equipment purchase, assuming a monthly cash flow is $30,400.

Answer 1

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Cost	Amount	nature
Administrative salaries	$     15,500	Fixed
Advertising	$     11,000	Fixed
Depreciation on factory building	$        1,500	Fixed
Depreciation on office equipment	$           800	Fixed
Insurance on factory building	$        1,500	Fixed
Miscellaneous expenses—factory	$        1,000	Fixed
Office supplies expense	$           300	Fixed
Professional fees	$           500	Fixed
Property taxes on factory building	$           400	Fixed
Raw materials used	$     70,000	Variable
Rent on production equipment	$        6,000	Fixed
Research and development	$     10,000	Fixed
Sales commissions	$     40,000	Variable
Utility costs—factory	$           900	Fixed
Wages—factory	$     70,000	Variable
Total Fixed Cost	$     49,400
Total Variable Cost	$   180,000
Variable Cost per unit	$        18.00
$180,000/10,000 units produced
Selling price per unit	$              40
Less: Variable cost per unit	$            -18
Contribution Margin per unit	$              22
Break even point in units ($49,400/$22)	2,245
Break Even points in $ (2,245*$40)	$     89,818
Part 2
Payback Period ($720,000/$30,400)	23.68	Months