Question
1.For your first assignment, management has provided the following revenue and cost information: High-End Set Economical Set Sales price $3,500 per unit $1,000 per unit
1.For your first assignment, management has provided the following revenue and cost information:
High-End Set Economical Set Sales price $3,500 per unit $1,000 per unit Labor $875 per unit $250 per unit Materials $1400 per unit $300 per unit
Direct fixed costs $25,000 per month $16,500 per month Allocated fixed costs $85,000 per month $85,000 per month
They want a better understanding of their business to make budgeting and sales goals decisions and have asked you to determine their:
- Contribution Margins for each product line
- Break-even quantities for each product line
- Break-even quantities to earn $500,000 per year margin on the high-end line (at the current sales price)
- Break-even quantities to earn $300,000 per year margin on the economical line (at the current sales price)
They expect the product lines to fully absorb the costs allocated to them. They have also asked that you show each step in your calculations so that they can understand your analysis. (Note: you will be graded on your intermediary values.)
Once you have determined these amounts, they have asked that you:
- present the information
- describe how you performed your calculations
- and explain what the results mean
2. Later, the company is considering the purchase of machinery and equipment to set up a line to produce a combination washer-dryer. They have given you the following information to analyze the project on a 5-year timeline:
- Initial cash outlay is $150,000, no residual value.
- Sales price is expected to be $2,250 per unit, with $595 per unit in labor expense and $795 per unit in materials.
- Direct fixed costs are estimated to run $20,750 per month.
- Cost of capital is 8%, and the required rate of return is 10%.
- They will incur all operational costs in Year 1, though sales are expected to be 55% of break-even.
- Break-even (considering only direct fixed costs) is expected to occur in Year 2.
- Variable costs will increase 2% each year, starting in Year 3.
- Sales are estimated to grow by 10%, 15%, and 20% for years 3 - 5.
They have asked you to calculate:
- The product's contribution margin
- Break-even quantity
- NPV
- IRR
Once you have determined these amounts, they have asked that you present the information, describe how you performed your calculations, and explain what the results mean.
After you have completed the calculations and presented your work, management makes the investment.
- Explain how the project analyses do or do not support this decision.
- In either case, what are the factors that should have been considered in management's decision?
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