Question

1. For your first assignment, management has provided the following revenue and cost information:

	High-end set		economical set
Sales price	$3,500	price unit	$1,000	Per unit
Labor	$875	per unit	$250	per unit
materials	$1,400	per unit	$300	per unit
direct fixed costs	$25,000	per month	$16,500	per month
allocated fixed cost	$85,000	per month	$85,000	per month

They want a better understanding of their business to make budgeting and sales goals decisions and have asked you to determine their:For this activity, you have been hired as a team of consultants on a multi-year basis for a global washer and dryer manufacturer. They currently offer two core washer and dryer sets: a high-end model and an economic model. You are tasked to complete several calculations and present your findings to the company stakeholders.

1. Contribution Margins for each product line
2. Break-even quantities for each product line
3. Break-even quantities to earn $500,000 per year margin on the high-end line (at the current sales price)
4. Break-even quantities to earn $300,000 per year margin on the economical line (at the current sales price)

They expect the product lines to fully absorb the costs allocated to them. They have also asked that you show the each step in your calculations so that they can understand your analysis. (Note: you will be graded on your intermediary values.)

Once you have determined these amounts, they have asked that you:

• present the information
• describe how you performed your calculations
• and explain what the results mean

Answer 1

1.

	High end set	Economical set
Sales price	3500	1000
Less: Variable costs
Labor	875	250
Materials	1400	300
Contribution per unit	1225	450

2. Break even point for high end set = Total fixed costs / Contribution per unit =  (110,000*12)/ 1225 = 1078 units (rouned off)

Break even point for economical set = Total fixed costs / Contribution per unit = (101,500*12)/ 450 = 2707 units (rouned off)

3. Break-even quantities to earn $500,000 per year margin on the high-end line = Desired profit + Fixed costs / Contribution per unit (110,000*12)+ 500,000 / 1225 = 1486 units

Break-even quantities to earn $300,000 per year margin on the high-end line = Desired profit + Fixed costs / Contribution per unit (101,500*12)+ 300,000 / 450 = 3373 units

Conclusion: The economical set is set a lower price and hence the contribution per unit is lower. However the contribution margin from this set is higher at 45% [ 450/1000] when compared to the high end set at 35% [ 1225/3500]. Since the contribution per unit is lower for the economical model but the fixed costs allocated to both models are similar , the break even units required are higher.