Question
Case: The Dial Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity,
Case: The Dial Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow:
Direct Labor | $118,000 |
Advertising | $50,000 |
Factory supervision | $40,000 |
Property taxes, factory building | $3,500 |
Sales commissions | $80,000 |
Insurance, factory | $2,500 |
Depreciation, administrative office equipment | $4,000 |
Lease cost, factory equipment | $12,000 |
Indirect materials, factory | $6,000 |
Depreciation, factory building | $10,000 |
Administrative office supplies (billing) | $3,000 |
Administrative office salaries | $60,000 |
Direct materials used (wood, bolts, etc.) | $94,000 |
Utilities, factory | $20,000 |
The patio sets are normally sold for $400 per set. Dial can increase capacity by 500 units to 2,500 units (from previous capacity of 2,000 units) but must pay $25,000 to do so. Annual cost data for the production of 2,000 sets are classified as follows: For the following questions, please use the information provided to help support your decisions. Please document your answer in a clear, concise way and reference any numbers and steps that were used to make your decision. Each question is independent and refers to the original data unless specified otherwise.
Part A) Please prepare a contribution margin income statement at normal capacity and label the income statement as Figure 1. Please show the following format and show columns for totals and per unit. Assume that sales are priced at the normal price. Please document your answer in a clear, concise way and reference any numbers and steps that were used to make your decision.
Total at 2,000 | Per Unit | |
Sales | ||
Variable Costs | ||
Contribution Margin | ||
Fixed Costs | ||
Operating Income |
Part B) Do total fixed costs change if units change from 1,000 to 2,000 units? Why or why not? Please mention the concept of relevant range in your answer. What is the variable cost per unit and what are the total variable costs for 2,000 units? Please explain your calculations and reference to the chart in Figure 1. Please document your answer in a clear, concise way and reference any numbers and steps that were used to make your decision.
Part C) If demand for 2020 is instead 2,500 units should the company pay to increase their capacity? Why? Please explain your calculations and reference to the chart in Figure 1. Assume units are sold at the normal price. Please mention the concept of incremental profits. Please document your answer in a clear, concise way and reference any numbers and steps that were used to make your decision.
Hint: If you expand capacity, you will have to pay additional fixed costs of $25,000. Remember that fixed costs are fixed within the relevant range. If you expand capacity then you are outside this range. If you expand capacity then you can make revenue on 500 additional units at the normal price and would pay variable costs on 500 additional units. Please consider the incremental profit or loss of expanding capacity. The incremental profit is the increase in revenues minus the increase in costs of adding 500 more units. If the incremental profit of expanding capacity is positive then you should do so.
Part D) Assume sales and demand are 1,000 units, how much will the company make on the sale of the next two units if demand expands to 1,002 units. Discuss which amounts on the income statement will change if the company makes and sells two more units. Please discuss your calculations and reference to Figure 1. Please document your answer in a clear, concise way and reference any numbers and steps that were used to make your decision.
Cost Behavior Variable Selling or Administrative Cost Product Cost Indirect Cost Item Fixed Direct Direct labor $118,000 $118,000 Advertising $50,000 $50,000 Factory supervision 40,000 $40,000 Property taxes, factory building 3,500 3,500 Sales commissions 80,000 80,000 Insurance, factory 2,500 2,500 Depreciation, administrative office equipment 4,000 4,000 Lease cost, factory equipment 12,000 12,000 Indirect materials, factory.. 6,000 6,000 Depreciation, factory building 10,000 10,000 Administrative office supplies.. 3,000 3,000 Administrative office salaries 60,000 60,000 Direct materials used 94,000 94,000 Utilities, factory 20.000 20.000 Total costs. $321.000 $182,000 $197.000 $212.000 $94.000Step by Step Solution
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