In: Accounting
1. Sand in Your Shoes, Inc., makes and sells sandals. Last month they sold 4700 units, for $ 275 each. The cost of leather to make a pair of sandals is $ 37, but the artisans who produce them take three hours of labor to make each pair and are paid $ 28 an hour. The electricity cost per finished pair is $ 4 each, and the company pays a $ 15 sales commission per pair sold. Totals of factory costs per month are rent of $ 170,000, insurance of $ 46,000 and the production supervisor makes $ 55,000 each month. The sales staff receives salaries of $ 51,000 each month and the salesroom rent is $ 29,000 monthly.
Compute the company’s breakeven in units and in sales dollars, and the company’s margin of safety. Write up a contribution margin income statement for the company for last month.
The production manager, Stephanie, feels she can increase sales by 15% by increasing product quality. She feels that this could be accomplished in one of three ways, either by 1, hiring a second production manager for quality control at $ 52,000 salary a month, or 2, by adding a monthly worker training program at $ 25,000 each month, which would be required to be completed successfully monthly by all assemblers but would be rewarded with a raise of $ 12 per hour from now on for the artisans, or finally 3, by using a higher quality materials costing $ 65 per pair, along with an advertising campaign cost of $ 15,000 monthly.
Are any of these options a good idea? If two are, which is best? Show with appropriate computations.
Part 1
Units produced and sold | $ 4,700 | |
Contribution margin income statement | ||
Per unit | Amounts ($) | |
Sales revenue | $ 275.00 | $ 1,292,500 |
Less: Variable cost | ||
Direct material | $ 37.00 | $ 173,900 |
Direct labor (28*3) | $ 84.00 | $ 394,800 |
Variable manufacture overhead (electricity) | $ 4.00 | $ 18,800 |
Sales commission | $ 15.00 | $ 70,500 |
Total variable cost | $ 140.00 | $ 658,000 |
Contribution margin | $ 135.00 | $ 634,500 |
Less: fixed cost | ||
Fixed manufacturing overhead (170000+46000+55000) | $ 271,000 | |
Fixed selling and admin cost (51000+29000) | $ 80,000 | |
Total fixed costs | $ 351,000 | |
Net operating income | $ 283,500 | |
Total fixed costs | $ 351,000 | |
Divided by: Contribution margin per unit | $ 135 | |
Breakeven in units | 2,600 | |
Breakeven in units | 2,600 | |
Multiply: Selling price per unit | $ 275 | |
Breakeven in sales dollars | $ 715,000 | |
Sales revenue | $ 1,292,500 | |
Less: Breakeven in sales dollars | $ 715,000 | |
Margin of safety | $ 577,500 | |
Divided by: Sales revenue | $ 1,292,500 | |
Margin of safety (in percentage) | 44.68% |
Part 2
Units sold (4700*(1+15%)) | 5,405 |
Alternative 1 | |
Sales revenue (275*5405) | 1,486,375 |
Less: Variable cost (140*5405) | 756,700 |
Contribution margin | 729,675 |
Less: fixed cost (351000+52000) | 403,000 |
Net operating income | 326,675 |
Increase in labor cost (12*3) | 36 |
Alternative 2 | |
Sales revenue (275*5405) | 1,486,375 |
Less: Variable cost ((140+36)*5405) | 951,280 |
Contribution margin | 535,095 |
Less: fixed cost (351000+25000) | 376,000 |
Net operating income | 159,095 |
Increase in material cost (65-37 old material cost) | 28 |
Alternative 3 | |
Sales revenue (275*5405) | 1,486,375 |
Less: Variable cost ((140+28)*5405) | 908,040 |
Contribution margin | 578,335 |
Less: fixed cost (351000+15000) | 366,000 |
Net operating income | 212,335 |
Alternative 1 is best option. | Alternative 1 |
Alternative 1 has higher net operating income compared to net opearting income of 283,500. | 326,675 |