1. Sand in Your Shoes, Inc., makes and sells sandals. Last month they sold 4700 units,...

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.

Expert Solution

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

ekkarill92 answered 3 years ago

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