Cornell Tool Manufacturing wants to begin selling a new pair of hand-held pliers

Question

Cornell Tool Manufacturing wants to begin selling a new pair of hand-held pliers in the upcoming fisca year. They want to know how many hand-held pliers they will have to sell in order to break-even on this investment 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: $0 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

1.

Variable cost per unit (orginal) = $5

Variable cost per unit (New) = $1*400% + $2*150% +$0.50*300% + $0.50*500% + 5%*$20

= $12

Fixed costs = $120,000

Operating inocme (original) = sales units*(sales price per unit - Variable cost per unit) - Fixed cost

= 1,600units*($20-$5)*12 - $120,000

= $168,000

Operating income(new) = 1,600units*($20- $12)*12 - $120,000

= $33,600

Contribution margin%(Orginal) = (Sales price per unit - Variable cost per unit)/sales price per unit*100

= ($20-$5)/$20*100

= 75%

CM % (New) = ($20- $12)/$20*100

= 40%

Margin of safety (original) = (Fixed cost + target profit) / CM ratio

= ($120,000 + $150,000)/75%

= $360,000 or 18,000 units

Margin of safety (New) = ($120000 + $150,000)/40%

= $675,000 or 33,750 units

2.

Alternative contract cost = $1,500*12months + 1600units*12 month*2.5%

= $27,600

Operating Income = orginal operating income - alternative contract cost

= $ 168,000 - $27,600

= $140,400

CM % = 75% - 2.5%

= 72.5%

Margin of safety = ($120,000+$18,000+ $150,000)/72.5%

= 397,241

New Orginal Change Operating Income $33,600 $168,000 134,400 CM % 40% 75% 35% Margin of safety 675,000 360,000 315,000

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