Over the years, Garnier Industries Inc. has earned an enviable reputation for th
ID: 2735715 • Letter: O
Question
Over the years, Garnier Industries Inc. has earned an enviable reputation for the quality of its factory-built houses. Although the market for prefabricated homes has been increasing, prices have been stagnant due to the fierce competition created by the arrival of new entrants to this segment of the housing industry. To remain profitable, Garnier has to find ways of reducing costs without sacrificing the quality of its products, while preserving its hard-earned reputation for quicker delivery than most of its competitors. Garnier has attempted to keep the general, selling and administrative costs as low as possible (considered all fixed) but next year they are expected to be $470000.
The company sells different models of single-family houses in the following product lines: Luxury, Standard, and Affordable. The average contribution margin of the Luxury line models is $9500. Models in the Standard line generate an average contribution margin of $6500, and the low-cost models in the Affordable line contribute an average of $3000. The actual production capacity of 90 units is used at 100%, and the current sales mix is 11 units of Luxury models, 34 units of Standard models, and 45 units of Affordable models.
Garnier is considering the possibility of acquiring 4 computer-controlled machines that will decrease overall manufacturing time by 10% and increase its annual total capacity by 25%. The new computer-controlled machines will have in total an annual capacity of 12,000 hours, and they will reduce labor costs and spoilage of direct materials for all models. With no change in the selling price, the new average contribution margin for the 3 models will be, respectively, $9100, $7800, and $5500 for the Luxury, Standard, and Affordable models. The product mix is constrained by the demand for each type of house in the marketing territory covered by Garnier. The maximum demand for each type is estimated at 15 units of Luxury, 40 units of Standard, and 65 units of Affordable. Each unit of the Luxury models will require 154 hours of computer-controlled machine hours, while each unit of the Standard models will require 133 hours and each unit of the Affordable models 102 hours.
Required:
Given the current sales mix, what is Garnier’s breakeven point in sales units? How many of the breakeven units will be of each type of house?
If no constraints existed except demand constraints, what is the order of production of the house types and the overall net income before taxes (NIBT) for Garnier under the current production method?
Why do you think the current sales are different from your system addressed above?
Given the purchase of the new equipment, what is the order of production (limited machine hours and demand do exist)and quantities you would recommend to Garnier? What would be the expected NIBT under your system?
Assume you can manufacture five more houses by running the machines an extra hour a day over the year. What five unit types would you manufacture?
Explanation / Answer
Given the current sales mix:
The current sales are different from the system addressed because present sale mix is utilising 100% production capcity and upon installing new system production capacity will increase by 25%.
The expected NIBT under your system = $215,000
Assume you can manufacture five more houses by running the machines an extra hour a day over the year. What five unit types would you manufacture?
Affordable house shall be manufactured as thereis demand for Affordable and full demand has been filled up for Luxury and Standard houses.
Garnier Industries Inc Contribution per unit No Total Contribution Weightage Weighted Cont. per unit Luxury 9500 11 104500 0.23 2156 Standard 6500 34 221000 0.48 3119 Affordable 3000 45 135000 0.29 879 90 460500 6155 Average Contribution per unit 6155 Break-even units (470000/6155) 76.4 Break-even units type No Luxury 17 Standard 37 Affordable 22Related Questions
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