Question

Dave's Desks produces wooden desks. Their desks are designed for elementary and middle schools, and therefore, schools are their largest customers. The cost of manufacturing and marketing their desks, at their normal factory volume of 300 desks per month, is shown in the table below. these desks sell for $99 each. Dave's Desks is making a small profit, but would prefer to increase profitability.

Unit Manufacturing costs:

Variable Material: $15

Variable Labor: $30

Variable Overhead: $20

Fixed Overhead: $15

Total unit manufacturing costs: $80

Variable marketing costs: $10

Fixed marketing costs: $5

Total unit marketing costs: $15

Total unit costs:$95

1. What is the break-even point? In units? and In sales dollar?

2. A nearby school district has offered to purchase 500 desks (one time) if the price was lowered to $90 per desk. The whole one-time order must be delivered within the same month. Dave's Desks maximum capacity is 600 units per month. Based on the cost data provided, what would be the impact of the special sale on sales, costs, and operating income if Dave's Desks accepted this sale? Use a contribution margin income statement to show your results. Do you think Dave's Desks should accept this sale?

Answer 1

Variable cost :15+30+20+10=75

Contribution margin : price -variable cost

               = 99- 75

               = $ 24

Contribution margin ratio = contribution /price

               = 24/99

                = .2424

Total fixed cost : 300[15manufacturing+5marketing] = 6000

1)BEP (units) =Fixed cost /contribution per unit

           = 6000 /24

            = 250 units

BEP($)= Fixed cost .CM ratio

          = 6000/ .2424

        = $ 24752   [rounded to 24750]

2)

	Without special offer	With special offer	Increase/(decrease)
Units	300	600** restricted to maximum capacity ,regular sales will be affected.
Sales	300*99= 29700	[500*90]+[100*99] 54900	25200 increase
variable cost	300*75 =22500	600*75=45000	22500 increase
contribution margin	7200	9900	2700 increase
less:Fixed cost	(6000)	(6000)	NA
nET income	1200	3900	2700 increase

**Acceptance of offer will effect regular sales since maximum capacity is 600 units .so 500 units of special offer and 100 units of regular sales

Dave's should accept the offer.