Cornell Tool Manufacturing wants to begin selling a new pair of hand-held pliers
ID: 2544947 • Letter: C
Question
Cornell Tool Manufacturing wants to begin selling a new pair of hand-held pliers in the u year. They want to know how this inves pcoming fiscal many hand-held pliers they will have to sell in order to break-even on tment in materials and equipment. Management has provided you with the following data: Annual Fixed costs: Metal molding maching: $100,000 Plastic grip molder: $15,000 Sander: $5,000 Employee costs: $O Variable costs (per unit): Packaging material: $1.00 Raw material:$2.00 Grip material: $0.50 Shipping: $0.50 Sales commission: 5% of sales Since this is a new company, the only employee currently being paid is Sally, the marketing manager. Sally estimates that the company can sell its new pliers for $20.00 per unit. She further projects that they will, on average, produce and sell 1,600 units per month. The goal is that they will break-even and start to earn a profit within the first year. The target-profit level for the end of the first fiscal year is $150,000.
Explanation / Answer
Ans. 1 yes, Company achieves its break-even level on the sale of 8,000 units if company achieves its expected monthly 1,600 units or 19,200 units annually it will earn a profit of $168,000.
Ans. 2 yes, Cornell earns $168,000 operating income if it sells 1600 units monthly or 19200 units annually.
Ans. 3 Cornell exceeds by $18,000 ($168,000 - $150,000) its target profit.
Ans. 4 if Cornell achieves its expected monthly sales in units, it will take 5 months (1,600 x 5 = 8000 units) to achieve breakeven.
Ans. 5 Margin of Safety = Profit / CM %
= $168,000 / 0.75 = $224,000
Assumptions
Product #1
Hand held Pliers
Sales Price per unit :
$20
Variable Cost per unit :
Packaging material
$1
Raw Material
$2
Grip Material
$0.50
Shipping
$0.50
Sales Commission
$1 (5% of Sales)
Total Variable Cost per unit
$5
Annual Fixed Cost :
Metal Molding Machine
$100,000
Plastic grip moulder
$15,000
Sander
$5,000
Employee Cost
$0
Total Fixed Cost
$120,000
Expected Monthly sales in units
1600 units per month
Target Profit-level for the first fiscal year
$150,000
Cornell Tool Manufacturing
Contribution Margin Income Statement
For the Fiscal year ended December, 31
Assumptions
Product #1
Hand held Pliers
Sales Price per unit :
$20
Variable Cost per unit :
Packaging material
$1
Raw Material
$2
Grip Material
$0.50
Shipping
$0.50
Sales Commission
$1 (5% of Sales)
Total Variable Cost per unit
$5
Annual Fixed Cost :
Metal Molding Machine
$100,000
Plastic grip moulder
$15,000
Sander
$5,000
Employee Cost
$0
Total Fixed Cost
$120,000
Expected Monthly sales in units
1600 units per month
Target Profit-level for the first fiscal year
$150,000
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