Question

Classic Cabinets has a factory that produces custom kitchen cabinets. It has multiple product lines.

Materials and labor for the cabinets are determined by each job. To simplify the assignment, we will assume the following average costs.

The materials include $1,000for the wood and other materials of $200. Both items listed are on a per job basis. It requires 20 hours of labor on average for a custom kitchen. The hourly rate is $10. The sales price will be set at a markup of 65%.

The company estimates that it will have 16,000 direct labor hours in total for the kitchen cabinets

It assumes 800units are sold on average per year. A breakdown of estimated yearly costs related to the kitchen cabinets follows:

Salaries-office & administrative$ 520,000

Salaries for factory personal$ 220,000

Office Rent $ 125,000

Factory Rent$ 20,000

Utilities and Misc office expenses(based on units sold)$ 20,000

Travel(based on units sold)$ 24,000

Insurance -office$ 12,000

Depreciation -office equipment$ 40,000

Depreciation for factory equipment$ 70,000

Advertising$ 20,000

Sales commissions(based on units sold)$ 45,000

Factory Property taxes$ 10,000

Maintenance for factory equipment$ 80,000

QUESTIONS:

1.Determine the cost of manufacturing one custom kitchenassuming the units given.Assume the MOH costs are allocated based on the direct labor hours per unit.Please show all calculations and round to the nearest dollar. I would recommend that you calculate the MOH per kitchen first.You should calculate an Overhead rate. Discuss other optionsfor the activity baseand the importance ofthe MOH allocation. Do multiple product lines impact the MOH allocation?

2.What are the variable costs for this product line? What are the fixed costs? I would recommend that you show a schedule for each areaon a yearly basis. For the variable costs, also, show them on a per unit(800 units) How does a company identify each type of cost? Can a cost classification be changed over time?If yes, explain how. If no, explain why?

3.What is the Contribution Margin(CM)in totalandper unitdollars, and CM%for the sale of 800 kitchen cabinets? Explain the importance of CM and how it can be used by companies to predict future income.Create some exampleswith numbersto show howit can be used.

4.Prepare a traditional Income Statement assuming avolume of 800 units. For the cost of goods sold, please use theper unit cost you calculated in #1. You do not have to prepare any additional schedules.I would use a similar format to exhibit 16-8 on page 737or from your lecture notes. I recommend that you list out all operating expenses given above. Do not use just Selling and General/Administrative Expenses for your categories. Points will be lost by not listing out all period costs. You can ignore interestand income tax expense.

5.Prepare three CVP Income Statements using the following yearly volumes: 400,800and1,200. Keep in mind howvariable and fixed costs behave. The traditional income statement from #4 should be about the same net income as the 800 units for the CVP format.(use exhibit 20-12page 893as your example –please note that it is missing a title and your numbers are for a year.)a)Calculate Break-even in units and sales $ for the companyb)Calculate units and sales $ if the company wants a profit of $1,000,000.c)Margin of safety for 800 units.Discuss the importance of these calculations to a company.Fully discuss the differences between the traditional vs CVP format.Give examples supported by numbers of how you would use these calculations as the CFO of the company.

6.If the following changes were to be made, calculate a new CVP Income Statement: Direct Material costs decrease by 10%; fixed costs increase by 15% and sales price would increase by 5%. Assume you are selling the 800 units. Should the company consider these changes? Why or why not? Givesome real examples of cost increases for fixed costs anddecreases for direct materialsthat could be implemented for the business.

7.Explain what will happento the MOH costs on a per unit basis if fewer units are sold. Could it impactper unit cost? (keep in mind the type of cost that MOH is)If another product linethat would share the MOH costswas added, how would it impact the MOH costs?Should ABC be considered? Why? Fully discuss all pertinent points and showcalculations needed to support your answers.I highly recommend including numbers to support the answer!!

8.To become more familiarwith Financial Statements, understand the industry for thiscompanyand finding information through Edgar for SEC filings, please use Masco Corporation(SIC 2430)information to answer the following questions. The website to access the 10K ishttp://www.sec.gov/edgar/searchedgar/companysearch.html. You should use the 12/31/15 10K filing. This company is in the same industry as Classic Cabinets.

a)Identify the company’s product lines and give examples of each area that the company offers.Which line has the largest sales and profits? What is included in the otherspecialty product line?

b)Answer the following questionsrelated to the cabinet segment: is there a reliance on a small number of large customers? If, yes who are they? What does this mean to the company and investors? What type of warranty issues are there for this segment? International vs domestic sales –how is the segment doing? Receivables and bad debt –what are the areas of concern?

c)Describe what has been happening inthe cabinet market? What has been the financial impact? How is the company addressing these issues?Who are their competitors in this market?How are they positioning this segment for the future?Identify any other areas for this segment that would be important for an investor to understand.

d)Make sure you review the Management Discussion and analysis and risk factors for the company.

e)Apply the knowledge of the industry you acquired to make a list of recommendations(minimum of 2) that Classic Cabinets should implement and/or be aware of when running their business

Answer 1

The Overheads can be of two nature
a)Fixed Overhead: which are fixed expenses incurred as a part of Business irrespective of the units of goods produced/sold
b)Variable Overheads : which are not fixed and are dependent on the number of units.
The Overheads can be further clasified into different nature as to
1)Manufacturing Overhead(OH) : Overhead/ Costs which are incurred in relation to the production of goods or Manufacturing department
2)Sales and Admin OH: Overhead/ Costs related to admininstrative work and sales related expenditure
3)General OH : Overheads/ Costs that can not be assigned to a particular department are called General OH
	Classification: Fixed or Varible	Type	Total Cost	Cost per unit
Salaries for factory personal	Fixed	Manufacturing OH	$      220,000
Factory Rent	Fixed	Manufacturing OH	$         20,000
Depreciation for factory equipment	Fixed	Manufacturing OH	$         70,000
Factory Property taxes	Fixed	Manufacturing OH	$         10,000
Maintenance for factory equipment	Fixed	Manufacturing OH	$         80,000
Total Fixed Manufacturing OH Cost	$      400,000	$                500
Utilities and Misc office expenses(based on units sold)	Variable	Manufacturing OH	$         20,000
Total Variable Manufacturing OH Cost	$        20,000	$                  25
Total Manufacturing OH Cost	$      420,000	$                525
Salaries-office & administrative	Fixed	Sales and Admin OH	$      520,000
Office Rent	Fixed	Sales and Admin OH	$      125,000
Insurance -office	Fixed	Sales and Admin OH	$         12,000
Depreciation -office equipment	Fixed	Sales and Admin OH	$         40,000
Advertising	Fixed	Sales and Admin OH	$         20,000
Total Fixed Sales & Admin OH Cost	$      717,000	$                896
Travel(based on units sold)	Variable	Sales and Admin OH	$         24,000
Sales commissions(based on units sold)	Variable	Sales and Admin OH	$         45,000
Total Variable Sales & Admin OH Cost	$         69,000	$                  86
Total Sales& Admin OH Cost	$      786,000	$                983
Calculation of cost of Manufacturing for a custom kitchen
Direct Material Cost(1000+200)	1200
Labour Cost($10*20 hrs)	200
Direct Cost	1400
Total Manufacturing OH (as per schedule)	525
Cost of manufacturing	1925
Sales & Admin OH	983
Cost of Goods sold	2908
>>Yes Multiple product line impact the MOH allocation as there need to be proper allocation of Overhead cost based on their respective usage
Cost Analysis on Fixed and Variable basis	Per Unit	for 800 units
Fixed Costs:
Total Fixed Manufacturing OH (as per Schedule)	$                  500	$                     400,000.00
Total Fixed Manufacturing OH (as per Schedule)	$                  896	$                     717,000.00
Total Fixed	$               1,396	$                  1,117,000.00
Variable Costs:
Direct Material Cost(1000+200)	$               1,200	$                     960,000.00
Labour Cost($10*20 hrs)	$                  200	$                     160,000.00
Direct Cost	$               1,400	$                  1,120,000.00
Variable Manufacturing OH	$                    25	$                       20,000.00
Variable Sales OH	$                    86	$                       69,000.00
Total Variable	$               1,511	$                  1,208,800.00
Total Cost	$         2,907.00	$                  2,325,800.00