Question
Arden Inc. manufactures and sells Speed-ies, a fast-moving recreational vehicle. Speed-ies are sold at RV retail stores and at some department stores at a price
Arden Inc. manufactures and sells Speed-ies, a fast-moving recreational vehicle. Speed-ies are sold at RV retail stores and at some department stores at a price of $4000 per Speed-ie unit. The 2020 actual average cost per unit for Seed-ies, based on the actual 2020 production and sales volume of 5,000 Speed-ies, is provided below:
Manufacturing costs per unit:
Direct Materials $ 1270.00
Direct Labor 740.00
Variable manufacturing overhead 330.00
Fixed manufacturing overhead 760.00
Total manufacturing costs per unit $3,100.00
Nonmanufacturing costs per unit:
Variable shipping costs $ 140.00
Variable selling commissions and marketing costs 150.00
Fixed marketing & administrative costs 120.00
Total nonmanufacturing costs per unit $ 410.00
Total cost per unit $3,510.00
Assume that each situation described in each question below is independent of the others. Unless stated otherwise, assume that the cost behavior patterns, selling price, and production and sales volume will continue into the future. Assume decision-makers are rational profit maximizers.
1. Compute the following:
(a) What is Arden Incs breakeven point in annual sales dollars?
(b) Assume an income tax rate of 25% on pretax operating income, at what level of annual sales volume in units of Speed-ies would Arden Inc. achieve an annual aftertax profit (aka net income) of $4,000,000?
(c) If Ardens 2021 sales volume is 20% higher than in 2020, then what will their pretax operating income level be in 2021?
2. Arden is considering investing in new manufacturing equipment in 2021. These new machines would increase Ardens fixed manufacturing overhead costs by $400,000 per year. However, this new equipment is expected to reduce Ardens direct labor costs by 10% and their variable manufacturing overhead costs by 5%. Expected production and sales volume, sales price, and other cost behaviors are expected to stay the same as in 2020.
(a) Should Arden purchase the new manufacturing machines in 2021? How much is the annual (pretax) operating income impact of this decision?
(b) At what annual production and sales volume level in units would Arden have the same annual pretax (operating) income under either cost structure? In other words, what is the point of indifference for annual sales volume in units?
3. Arden was approached by FunCo, which asked Arden to produce and sell an additional 1000 Speed-ies to FunCo at the special order price of $2500 per unit. FunCo indicated that if Arden agrees to this proposal, then FunCo would pick up these units from Ardens plant, saving Arden 80% of the variable shipping costs related to this order. Should Arden accept or reject this special order offer? How much is the impact on operating income from this decision? Assume Arden has sufficient excess capacity to handle the normal volume and this special order volume, and this special order will not affect other customer orders.
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