Each question refers to the same initial data. Treat each question separately. I

Question

Each question refers to the same initial data. Treat each question separately. Ignore income taxes. Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel.

Data for all questions: Panalon produces cast iron dutch ovens (a deep pot with a lid that can be used on a stovetop or in the oven). Their pots are sold at many local department stores. The cost of manufacturing and marketing their pots, at their normal factory volume of 5,000 pots per month, is shown in the table below. These pots sell for $50 each. Panalon is making a small profit, but would prefer to increase profitability.

(Note: 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.)

Question 3: Market research has shown that enameled pans are selling well. Panalon would be able to produce an enameled dutch oven by putting a special coating on their existing pots. This would increase fixed overhead costs by $40,000 per month (still based on normal production volume of 5,000 units). The variable materials costs (only variable material costs – not all variable costs) for the enameled pots would also be double the cost of the variable materials for the regular pots (to account for the coating). Maximum production for both types of pots together would still be 8,000 units because the same production lines would be used. The enameled pots would sell for $75 each. A) What would be the break-even point if Panalon only sold enameled pots? (In units and sales dollars) B) Create a contribution income statement for a month in which Panalon sold 2,500 regular pots, and 3,500 enameled pots. C) Explain, in your own words, how the changes to fixed and variable costs for the enameled pots impact profitability.

Per Unit Per Unit Unit Manufacturing Costs: Variable Materials Variable Labor Variable Overhead Fixed Overhead 12.00 9.00 5.00 3.00 Total Unit Manufacturing Costs 29.00 Unit Marketing Costs Variable Marketing Costs Fixed Marketing Costs 2.00 8.00 Total Unit Marketing Costs 10.00 Total Unit Costs: 39.00 Operating Income 11.00

Explanation / Answer

A) Break even point in units = fixed costs / contribution margin per unit

The contribution margin per unit for enameled products is as follows:

Fixed expenses

Note: the per unit fixed expenses have been multiplied by 5000 units as that is the normal production.

Break even point = 95000 / 35

= 2714 units

Break even in dollars = 2714 * 75

= $2,03,571

B) Contribution income statement for the month:

C) As a result of the introduction of enameled products, the profitability for the company has increased. This is becuase of the decrease in fixed costs per unit of product. The fixed costs remains the same for any number of units producted. Hence, with large number of units being produced, the fixed cost per unit of product decreases, thus increasing the profitabilty. The increase in variable cost of the product increases the total costs and reduced profitabilty. A decrease in the variable costs wil also directly impact the profits and the profits will fall.

Selling price per unit $75 Less: variable expenses materials $24 labour $9 Manufacturing overhead $5 marketing costs $2 Total variable expenses per unit $40 Contribution margin per unit $35

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