Question

Each question refers to the same initial data. Treat each Part individually. Ignore income taxes. Assume no beginning or ending inventories. Unless stated otherwise, all calculations and income statements should be based on a one-month period. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting – example below. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. One Excel file is to be submitted for this case study. No additional files (Word documents or otherwise) will be accepted or graded.

Contribution Margin Format Example:

Volume                                              XX

Sales                                                 XX

Variable Costs (Listed) XX

Variable Costs (Total) XX

Contribution Margin XX

Fixed Costs (Listed)          XX

Fixed Costs (Total)   XX

Operating Income XX

Data for all questions:

Stuckie produces white school glue. Their glue bottles are primarily sold at department stores across the country. The cost of manufacturing and marketing their glue, at their normal factory volume of 20,000,000 bottles of glue per month, is shown in the table below. Stuckie sells their glue bottles for $1.50 each. Stuckie is making a small profit, but they would prefer to increase their Operating Income.

Hint: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.

                                                                           Per Unit                              Per Unit

Unit Manufacturing Costs:

               Variable Materials $0.30

               Variable Labor $0.35

               Variable Overhead $0.10

               Fixed Overhead $0.25

Total Unit Manufacturing Costs:                                             $1.00

Unit Marketing Costs:

               Variable Marketing Costs $.05

               Fixed Marketing Costs $.20

Total Unit Marketing Costs: $.025

Questions:

1. Stuckie wants to understand their basic starting financial data.

1. What is their monthly fixed cost, variable cost per bottle of glue, and contribution margin per bottle of glue? Show your calculations for each.
2. Prepare a one-month Contribution Margin Income Statement for the company using the given financial data at their normal factory volume. Include line items for each type of cost as well as subtotals for the variable and fixed costs.
3. What is the break-even point in units? (Show your calculations.)
4. What is the break-even point in sales dollars? (Show your calculations.)
5. Using a one-month Contribution Margin Income Statement, verify that your calculated break-even volume results in Operating Income of Zero. (Prepare the entire Contribution Margin statement at the break-even level.)

2. An office supply chain has offered to purchase 10,000,000 bottles of glue (one time in one month) if the sales price was lowered to $1.25 per bottle for that one-time sale. (This specific sale is all or nothing – they will not purchase less than 10,000,000 bottles). Stuckie’s maximum capacity is 25,000,000 units, and this special sale would not impact the sales price of Stuckie’s normal sales to their usual customer base.

1. Prepare a monthly contribution margin income statement to show what would happen if Stuckie’s accepted the special sale to the office store chain and didn’t sell any other glue that month.
2. Prepare a monthly contribution margin income statement to show what would happen if Stuckie’s accepted the special sale to the office store chain and produced at maximum capacity to sell as much glue as possible to their normal customers.
3. Compare Stuckie’s normal contribution margin income statement (from question 1) to the options available through the office supply chain (2A & 2B). Should Stuckie’s accept the specific sale from the office supply chain? Why or why not?

Question 3:

Slime-making is a current fad, and this is creating a demand for larger bottles of glue. Stuckie’s would like to offer larger bottles of glue to their customers (to support slime making). In order to have a second bottle size option, Stuckie’s would need to invest in a new bottling line. This would increase fixed overhead costs by $4,000,000 per month. All variable costs (materials, labor, overhead & marketing) would increase 5X (500%) because of the bigger bottles and additional glue put into each bottle. Market research estimates that 5,000,000 of the larger bottles of glue could be sold per month.

A) If Stuckie’s ONLY sells these new, larger bottles of glue, what is the minimum sales price per bottle they could accept and still have the same operating income (as question 1)? Show your results in a contribution margin income statement.

B) If Stuckie’s can sell the larger bottles of glue for $10 each, what is the break-even point in units for the larger bottles of glue? (Show your calculation.)

C) If Stuckie’s can sell the larger bottles of glue for $10 each, what is the break-even point in sales dollars for the larger bottles of glue? (Show your calculation.)

D) If the slime-making fad goes away, and Stuckie’s needs to go back to selling only the small bottles of glue, what would be their maximum net operating income (based on maximum capacity and the additional factory investment)? Show your results in a contribution margin income statement.

Question 4:

Stuckie’s is thinking of cutting costs by switching to a different material supplier. Their variable material costs would decrease by 50% (only variable material costs – not all variable costs). The quality of the ingredients is lower, so Stuckie’s estimates that their additional fixed scrap costs related to the ingredient quality would be $1,000,000 per month. They would not change the pricing of their glue bottles.

Note: Use the initial data provided for all questions. Ignore the special sale and larger bottle data from Parts 2 & 3.

A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, costs and profits of using the different raw material (ingredient) supplier. (At normal volume.)

B) What is the break-even point in units? (Show your calculations.)

C) What is the break-even point in sales dollars? (Show your calculations.)

D) If their sales end up decreasing because of the change in quality, how much of a reduction in sales (dollars and units) could Stuckie’s handle and still keep their net operating income the same as before the supplier change? Show your data in a Contribution Margin Income Statement.

E) What are the potential impacts – both Qualitative and Quantitative – of the material supplier change? If you had to make the decision of whether to switch suppliers or not, what would you do? Why?

Answer 1

A) Total monthly fixed cost = ( fixed overhead per unit +fixed marketing cost per unit ) * total units at normal capacity

= (0.25 + 0.20) * 20,000,000

Therefore, total monthly fixed cost = $ 9,000,000

Variable cost per bottle of glue = ( Variable Materials per unit + Variable Labor per unit + Variable Overhead per unit + Variable Marketing Costs per unit)

= (0.30 + 0.35 + 0.10 + 0.05)

Therefore, variable cost per bottle of glue = $ $0.80

Contribution margin per bottle of glue = selling price per bottle of glue - variable cost per bottle of glue

= 1.50 – 0.80

Therefore, contribution margin per bottle of glue = $ $0.70

B)

Monthly Contribution Margin Income Statement for 20,000,000 botlles of glue
	SALES	$1.50 per bottle of glue		$     30,000,000
	Variable Materials per unit	$0.30 per bottle of glue	$                     6,000,000
	Variable Labor per unit	$0.35 per bottle of glue	$                     7,000,000
	Variable Overhead per unit	$0.10 per bottle of glue	$                     2,000,000
Less	Variable Marketing Costs per unit	$0.05 per bottle of glue	$                     1,000,000
	TOTAL VARIABLE COST			$     16,000,000
	TOTAL CONTRIBUTION MARGIN	$0.70 per bottle of glue		$     14,000,000
Less	TOTAL FIXED COST			$        9,000,000
	NET PROFIT			$        5,000,000

C) Break-Even Point in units = Total fixed costs ÷ Contribution per unit = $9,000,000 ÷ $0.70 per bottle of glue

= 12857142.86 units

D) break-even point in sales dollars = Total fixed costs ÷ Contribution Margin = $9,000,000 ÷ $1,4000,000 = 0.64

E)

Monthly Contribution Margin Income Statement for 12857142.86 botlles of glue
	SALES	$1.50 per bottle of glue		$         19,285,714
	Variable Materials per unit	$0.30 per bottle of glue	$                     3,857,143
	Variable Labor per unit	$0.35 per bottle of glue	$                     4,500,000
	Variable Overhead per unit	$0.10 per bottle of glue	$                     1,285,714
Less	Variable Marketing Costs per unit	$0.05 per bottle of glue	$                       642,857
	TOTAL VARIABLE COST			$         10,285,714
	TOTAL CONTRIBUTION MARGIN			$            9,000,000
Less	Fixed Expenses			$            9,000,000
	Net Profit or Loss			$                          0