Question
Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting example below. Analysis
Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting example below. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. One Excel file is to be submitted for this case study
Data for all questions: Curtain City produces fabric curtains for windows. Their curtains are sold at many department stores across the country. The cost of manufacturing and marketing their curtains, at their normal factory volume of 5,000 curtain panels per month, is shown in the table below. These curtains sell for $30 each. Curtain City is making a small profit, but would prefer to increase their Operating Income. Hint: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.
Curtain City is thinking of cutting costs by using a different fabric (raw material) supplier. Their variable material costs would decrease by 50% (only variable material costs not all variable costs). The quality of the fabric is lower, so Curtain City estimates that their additional fixed scrap costs related to the fabric quality would be $5,000 per month. They would not change the pricing of their curtains. Note: Use the initial data provided for all questions.
QUESTIONS:
A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, costs and profits of using the different raw material (fabric) supplier.
B) If their sales decrease because of the change in quality, how much of a reduction in sales (dollars and units) could Curtain City handle and still keep their net operating income the same as before the supplier change? Show your data in a Contribution Margin Income Statement.
C) Write a memo to the CFO that presents the pros and cons of the potential supplier change. Include the potential impacts on revenue costs and net operating income, as well as any other factors or consequences of this decision. Be sure to include quantitative evidence and backup as well as any qualitative analysis. Note: Your letter will be included in your Excel document either in the Excel cells or in a text box. Hint: The analysis is expected to be thorough. Expect to present approximately 400 words, and support your analysis with data (either given or calculated). Remember that this is a letter to the CFO, so proper grammar and spelling is expected.
Volume Sales Variable Costs (listed) Variable Costs Total Contribution Margin Fixed Costs (listed) Fixed Costs Total Operating Income Per Unit Per Unit Unit Manufacturing Costs: Variable Materials Variable Labor Variable Overhead Fixed Overhead Total Unit Manufacturing Costs: 3.00 4.00 2.00 5.00 14.00 Unit Marketing Costs: Variable Marketing Costs Fixed Marketing Costs Total Unit Marketing Costs: 1.00 3.00 4.00Step by Step Solution
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