Case 4-45 Cost-Volume-Profit with Multiple Products, Sales Mix Changes, Changes in Fixed and Variable Costs Artistic...

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Case 4-45 Cost-Volume-Profit with Multiple Products, Sales Mix Changes, Changes in Fixed and Variable Costs Artistic Woodcrafting Inc. began several years ago as a one-person cabinet-making operation. Em- ployees were added as the business expanded. Last year, sales volume totalled $850,000. Volume for the first five months of the current year totalled $600,000, and sales were expected to be $1.6 million for the entire year. Unfortunately, the cabinet business in the region where Artistic Woodcrafting is located is highly competitive. More than 200 cabinet shops are all competing for the same business. Artistic currently offers two different quality grades of cabinets: Grade I and Grade II, with Grade I being the higher quality. The average unit selling prices, unit variable costs, and direct fixed costs are as follows: OB Grade I Grade II Unit Price Unit Variable Cost $2,686 1,328. Direct Fixed Cost $95,000 95,000 $3,400 1,600 Common fixed costs (fixed costs not traceable to either cabinet) are $35,000. Currently, for every three Grade I cabinets sold, seven Grade II cabinets are sold. Required: 1. Calculate the number of Grade I and Grade II cabinets that are expected to be sold during the current year. 2. Calculate the number of Grade I and Grade II cabinets that must be sold for the company to break even. 3. Artistic Woodcrafting can buy computer-controlled machines that will make doors, drawers, and frames. If the machines are purchased, the variable costs for each type of cabinet will decrease by 9 percent, but common fixed costs will increase by $44,000 over the next seven months. Compute the effect on operating income, and also calculate the new BEP for the entire year. Assume the machines are purchased at the beginning of the sixth month. Fixed costs for the company are incurred uniformly throughout the year. Case 4-45 Cost-Volume-Profit with Multiple Products, Sales Mix Changes, Changes in Fixed and Variable Costs Artistic Woodcrafting Inc. began several years ago as a one-person cabinet-making operation. Em- ployees were added as the business expanded. Last year, sales volume totalled $850,000. Volume for the first five months of the current year totalled $600,000, and sales were expected to be $1.6 million for the entire year. Unfortunately, the cabinet business in the region where Artistic Woodcrafting is located is highly competitive. More than 200 cabinet shops are all competing for the same business. Artistic currently offers two different quality grades of cabinets: Grade I and Grade II, with Grade I being the higher quality. The average unit selling prices, unit variable costs, and direct fixed costs are as follows: OB Grade I Grade II Unit Price Unit Variable Cost $2,686 1,328. Direct Fixed Cost $95,000 95,000 $3,400 1,600 Common fixed costs (fixed costs not traceable to either cabinet) are $35,000. Currently, for every three Grade I cabinets sold, seven Grade II cabinets are sold. Required: 1. Calculate the number of Grade I and Grade II cabinets that are expected to be sold during the current year. 2. Calculate the number of Grade I and Grade II cabinets that must be sold for the company to break even. 3. Artistic Woodcrafting can buy computer-controlled machines that will make doors, drawers, and frames. If the machines are purchased, the variable costs for each type of cabinet will decrease by 9 percent, but common fixed costs will increase by $44,000 over the next seven months. Compute the effect on operating income, and also calculate the new BEP for the entire year. Assume the machines are purchased at the beginning of the sixth month. Fixed costs for the company are incurred uniformly throughout the year.