Question

Analysis of the profitability of adding the Hiking boot into CCB product mix .

Prepare a breakeven-analysis of CCB option to add the hiking boot into its existing product mix.Use the data provided in Exhibits 1 and 2 .Your analysis should consist of a break-even analysis of CCB existing and proposed products along with a summary discusiion.Use the following approach.

1. Calculate the breakeven in pairs for the Iron Horse work boot using the revised budgeted costs in Exhibit 1 alone.

2. Calculate the breakeven in pairs for the hiking boot using the data provided in Exhibit 2 alone.

3. Calculate the breakeven in pairs for both products combined using information from Exhibits 1 and 2.Base the salex mix on the 20X5 budget for the Iron horse product and the expected annual demand for the Robie reid product.

4. Calculate the margin of safety for all three breakeven points calculated in parts (1) through (3).

Exhibit 1

Revised 20X5 budget

Iron horse work boot
Revised budgeted cost per pair-20X5
	Qty	Measure	Cost per	Total cost
Direct Material
Leather	1.00	Square meter	$21.50	$21.5000
Other lining	0.25	Square meter	$19.60	$4.9000
Structural	2.00	Each	$1.95	$3,.000
Sole	2.00	Each	$4.10	$8.2000
				$38.5000
Direct Labour
Cutting	0.09	Hour	$25.20	$2.2680
Stitching	0.14	hour	$25.20	$3.5280
Forming	0.25	Hour	$25.20	$6.3000
Soling	0.18	Hour	$25.20	$4.5360
Finishing	0.11	Hour	$21.50	2.3650
	0.77			18.9970
Manufacturing overhead (applied based on direct labour hours)
Variable overhead	0.77	DLH	$10.39	$8.0003
fIXED OVERHEAD	0.77	DLH	$6.46	$4.9742
				12.9745
Total budgeted cost per pair to boots				$70.4715
Metal parts including shank and steel toe.
Including eyelets , hooks, glue, waxed thread, cutting wastage on leather and variable factory costs.
Fcatory costs including depreciation, property taxes, insurance, supervisory salaries and utilites.
Retain all decimals when calculating costs.

Additional budget information(20X5 budget)

20X5 forecast sales(pairs)	1,175,000
Selling price per pair	$96.50
Desired ending finished goods inventory(pairs)	20.000
Variable selling and administrative expense(per pair)	$6.50
Fixed selling and administrative expenses(in $000)	$17,600

CCB Company

Manufacturing overhead budget(revised), 20X5 budget(in '000s)

Variable manufacturing costs
Electricity	$2,282
Fuel	1,317
Inspection	527
Repair & Maintenance	3,072
Rework & Wastage	1,580
Total variable overhead costs	$8,778
Fixed manufacturing overhaed
Depreciation	4,696
Property taxes and Insurance	109
Supervisory salaries	273
Utilities	382
Total fixed manufacturing costs	5,460
Total manufacturing overhead costs	14,238

Note; The rates for both variable and fixed overhead are based on production of 1,097,000 pairs.

Exhibit 2:

Date August 20, 20X4

To : President

From : Marketing manager

Re: Design of the hiking boot

I have included the following detials of the design and proposed costs for the hiking boot.

Costs;After consulting with the purchasing staff, the following table of costs has been compiled listing the requirement times to manufacture and finish the boot.

The Hiking Boot
Budgeted cost per pair
	Qty	Measure	Cost per	Total cost
Direct material
Leather	0.50	Square meter	$21.00	$10.5000
Nylon	0.50	Square meter	$5.00	2.5000
Other lining	0.45	Square meter	$8.50	3.8250
Air-Cushioned midsole	2.00	Each	$2.30	4.6000
Sole	2.00	Each	$0.53	1.0600
				$22,4850
Direct Labour
Cutting	0.03	Hour	$25.20	$0.7560
Stitching	0.04	Hour	$25.20	1.0080
Forming	0.06	Hour	$25.20	1.5120
Soling	0.10	Hour	$25.20	2.5200
Finishing	0.03	Hour	$21.50	0.6450
	0.26			6.4410
Variable manufacturing overhead
Vraiable overhead	0.26	Hour	$16.26	4.2800
Total variable budgeted manufactuirng cost per pair of shoes				33.2060

Additional inormation

Lifetime(year)	10
Proposed selling price per pair	$50.00
Variable selling and administrative costs specific to the Robie product line(per pair)	$1.50
Fixed overhead cost specific to the production of the Robie	$360,000
Annual market demand and budgeted sales(pairs)	125,000
Annual fixed advertising costs	$120,000
Monthly leasing costs of cutting equipment	$1,500
Monthly leasing costs of sewing equipment	$2,300
Renovations required to implement leased equipment(Capitalized and depreciated over 10 year with no salvage value)	$672,000
Cost of process design, implementation and training	$420,000
Additional research and development, product design, patents and trademarks	$25,000
Desired markup on costs	20%

Answer 1

1). 1. Calculation of the breakeven in pairs for the Iron Horse work boot using the revised budgeted costs in Exhibit 1.
Total Variable Cost per pair:-
Direct Material = $38.50
Direct Labor = $18.9970
Var. mfr overhead = $8.0003
Var. selling and admin. cost = $6.50
Total var. cost per pair = $71.9973

Selling Price per pair = $96.50
Contribution per pair = $96.50 - $71.9973 = $24.5027

Fixed mfr cost = $5,460,000
Fixed selling and admin. cost = $17,600,000
Total Fixed cost = $23,060,000

Breakeven point = Total fixed cost / Cont. per pair
= $23,060,000 / $24.5027 = 941120.77 or 941121 pairs approx.

2). Calculation of the breakeven in pairs for the hiking boot using the data provided in Exhibit 2.
Total Variable Cost per pair:-
Direct Material = $22.4850
Direct Labor = $6.4410
Var. mfr overhead = $4.28
Var. selling and admin. cost = $1.50
Total var. cost per pair = $34.706

Selling Price per pair = $50
Contribution per pair = $50 - $34.706 = $15.294

Fixed overhead cost = $360000
Fixed advertising cost = $120000
Leasing cost of cutting equipment = $18000 = $1500 * 12
Leasing cost of sewing equipment = $27600 = $2300 * 12
Depreciation = $672000 / 10 = $67200
Total Fixed cost = $592800

Breakeven point = Total fixed cost / Cont. per pair
= $592800 / $15.294 = 38760.2981 or 38760 pairs approx.

3). Breakeven point of both products combined = 941121 pairs + 38760 pairs = 979881 pairs.
(I am unable to understand the other part of this point.)

4). Margin of safety :-
a). Sales forecast of Iron horse work boot = 1,175,000 pairs
Selling price = $96.50
Total sales value forecast = 1,175,000 * $96.50 = $113,387,500
Breakeven point = 941121 pairs * $96.50 = $90,818,176.5
Margin of safety = $113,387,500 - $90,818,176.5 = $22,569,323.5

b). Sales forecast of Hiking boot = 38,760 pairs
Selling price = $50
Total sales value forecast = 125000 * $50 = $6,250,000
Breakeven point = 38760 * $50 = $1,938,000
Margin of safety =$6,250,000 - $1,938,000 = $4,312,000.

c). Total Margin of Safety of both products combined:-
Margin of safety = $22,569,323.5 + $4,312,000. = $26,881,323.5