Reference no: EM132492759
T&J manufacturing 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 $1,000 for the wood and other direct 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 all product lines.
It assumes 800 units 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
Office Utilities and Misc office expenses (based on units sold) $ 20,000
Sales 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
Question 1. Create a traditional Income Statement assuming a volume of 800 units. For the cost of goods sold, please use the per unit cost you calculated in #1. I recommend that you list out all operating expenses given above. Do not use just Selling and General/Administrative Expenses for your categories.
Question 2. Create three CVP Income Statements using the following yearly volumes: 400, 800 and 1,200. Link this schedule to question #2 for VC and FC calculated. Keep in mind how variable and fixed costs behave. The traditional income statement from #5 should be about the same net income as the 800 units for the CVP format.
a) Calculate Break-even in units and sales $ for the company
b) 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. Compare and contrast the traditional vs CVP format. Fully discuss the differences (at least 3) between the traditional vs CVP format. Give examples supported by numbers in excel of how you would use these calculations as the CFO of the company.
Question 3. 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? This question is not just based on the new net income. Please review the full income statement for changes. What if the sales volume changes? Does this change your answer? I would recommend using volumes higher and lower to see how the changes impact your answer. Include CVP income statements in excel that are needed to support your answer.
Discuss real examples of cost increases for fixed costs (at least 2) and decreases for direct materials (at least 2) that could be implemented for this business. Can the company increase price? What other areas might be impacted due to the price increase? You are the CFO of this business what is important to consider? Give 2 industry specific details that can impact this discussion. Do some research for this industry. It is always important to understand the industry that you are in as some industries have different factors that impact sales and profitability.
Additional information for another product line
Assume another product line is also being considered - bathroom cabinets. Only use this information for the questions listed directly below.
- Higher skilled workers would be required which will result in paying them $18 per hour.
- Additional MOH costs for the year will be $170,000. These costs will be in addition to the costs already being incurred. These costs are due to the additional product line and also related to the current product lines for additional production abilities. The two lines will share all MOH costs.
Question 4. Should the company consider using ABC? Advantages and disadvantages? Discuss why or why not? Areas to include in the discussion but not limited to the following: impact on product cost, implications of not using the right allocation and its impact on price if any, what type of companies use ABC etc....
Question 5. How specifically would ABC help allocate MOH costs?