Question

Storage Sheds & More, Inc. manufactures and sells steel-sided easy-assembly storage sheds in the Midwestern region of the United States. The firm’s customers tend to live in smaller cities, towns, and rural areas in this portion of the country. Storage Sheds & More is headquartered in Sioux Falls, SD and was founded nearly 30 years ago by Roger Rude.

            Although the firm has been quite successful over its years of operation, Mr. Rude has noticed a down-turn in the sales of the “Garden Shed,” which was the firm’s best-selling product for many years. Mr. Rude has asked you to complete a breakeven analysis for him on this product. He has supplied you with the following information about the Garden Shed:

• The current selling price per unit (P) is $6,500.
• The variable cost per unit (VC) is $4,800. This includes the raw materials, direct labor, and applicable factory overhead costs to manufacture this product.
• The annual fixed costs (F) at the manufacturing facility applicable to the Garden Shed product total $3,250,000.

Given this information, please answer the following questions about the current breakeven point for the Garden Shed product:

1. What is the operating breakeven point in units for this product?

1. Using the operating breakeven point in units that you calculated in Question #1, what is the breakeven point in sales dollars for the Garden Shed product?

2. Mr. Rude now provides you with actual sales units for the Garden Shed product for the most recent fiscal year. According to his records, 2,450 Garden Sheds were sold in the most recent year. Calculate the operating profit (or operating loss) that the firm realized on the sale of these Garden Sheds.

3. Mr. Rude now informs you that he is considering automating the Garden Shed production line further. The new equipment that he is considering purchasing would produce a higher quality product, he believes, which may have a positive impact on sales. If the equipment is purchased, he plans to hold the selling price (P) of the Garden Shed constant at its current level: $6,500. However, the production costs will change, as follows:

• The new variable cost per unit (VC) will be $2,100.
• Fixed costs (F) applicable to the Garden Shed will total $5,200,000 for the fiscal year.

1. What is the new operating breakeven point in units for the Garden Shed, based on these new assumptions that feature a more automated production line?

2. Based on the new operating breakeven point in units that you calculated in Question #3.a., what is the new operating breakeven point for the Garden Shed in sales dollars?

4. Do you recommend that Storage Sheds & More continue with their current production process for the Garden Shed product or convert to the new, more automated, production process? Please describe.

           

Answer 1