Case 4-54 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.

Employees were added as the business expanded. Last year, sales volume totaled $850,000. Volume

for the first five months of the current year totaled $600,000, and sales were expected to be

$1.6 million for the entire year. Unfortunately, the cabinet business in the region where Artistic

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:

Unit Price Unit Variable Cost Direct Fixed Cost

Grade I $3,400 $2,686 $95,000

Grade II 1,600 1,328 95,000

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 Artistic to

break even.

3. Artistic 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%, but common fixed cost will increase by $44,000. Compute the effect on operating

income, and also calculate the new break-even point. Assume the machines are purchased at

the beginning of the sixth month. Fixed costs for the company are incurred uniformly

throughout the year.

4. Refer to the original data. Artistic is considering adding a retail outlet. This will increase

common fixed cost by $70,000 per year. As a result of adding the retail outlet, the additional

publicity and emphasis on quality will allow the firm to change the sales mix to 1:1. The

retail outlet is also expected to increase sales by 30%. Assume that the outlet is opened at

the beginning of the sixth month. Calculate the effect on the company's expected profits for

the current year, and calculate the new break-even point. Assume that fixed costs are

incurred uniformly throughout the year.