Assignment Details

Use the information provided here to answer the questions in Parts 1, 2, and 3 of the Mini-Project.

Kruger Corporation manufactures seat cushions for stadium and concert venue seating. The critical part of the manufacturing process uses a single machine that produces three different colors (forest green, navy blue, and purple), yielding three product lines.

The forecasted gross margins and operating income for each product line are presented in the table below:

Forest Green	Navy Blue	Purple	Total
Sales	142,000	96,000	123,000	361,000
Direct Materials	38,000	26,100	28,400	92,500
Direct Labor	18,000	12,300	13,000	43,300
Var OH - mftg	14,500	9,500	10,310	34,310
Fixed OH - mftg	13,500	2,020	5,770	21,290
Total Gross Margin	58,000	46,080	65,520	169,600
Var OH - non-mftg	24,300	18,900	20,670	63,870
Fixed OH - non-mftg	16,000	11,480	15,650	43,130
Operating Income	17,700	15,700	29,200	62,600
Number of Units to be Sold	6,600	2,475	1,925	11,000

Assume that the market will not substantially change in its preference for different colors going forward, and that the following statement from the chief financial officer is valid.

"Based on my experience, there is no way to split up fixed costs among the products in a truly representative way. Whatever allocation exists is likely just arbitrary."

Part 1

Based on the information provided, use the most appropriate method to predict how many of each color (forest green, navy blue, and purple) must be sold in order for the firm to break even. Be sure to provide supporting calculations for each of your answers.

Part 2

Suppose that new knowledge is available from the production line manager. Specifically, she offers the following information:

"Actually, the allocation of fixed costs to each of the product lines is based on a very informed process. Specifically, 90% of the fixed costs reported for each product line are directly traceable to that line. So, we're comfortable with the allocation for both manufacturing and non-manufacturing costs."

Based on this revised information (and assuming no other changes to available information), calculate the break-even point using the most appropriate method. Be sure to provide supporting calculations.

Part 3

Write a clear and concise statement detailing the following:

1. Explain why you used the methods you did in Part 1 and Part 2.
2. What assumption underlying CVP analysis is most crucial for each method you used?
3. Compare your answers in Part 1 and Part 2. Is the firm's calculation of the break-even point sensitive to the method adopted?
4. Provide other information that you feel is relevant if you were delivering your analyses to upper management, who will use this information for pricing, production, and other operational and strategic decisions. For what types of decisions are your analyses most useful?