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:

The patio sets are normally sold for $300 per set. Dial can increase capacity by 1,000 units to 3,000 units but must pay $25,000 to do so

Annual cost data for the production of 2,000 sets are classified as follows:

1. 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.

2. Assume sales and demand for 2020 are 2,000 units, what would be the minimum price that you would charge if you wanted to make a profit. Why is this the correct price? Please explain your calculations and reference to the chart in Figure 1.
3. If demand for 2020 is instead 3,000 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.

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 1,000 additional units and would pay variable costs on 1,000 additional units. Please consider the incremental profit or loss of expanding capacity. If the incremental profit of expanding capacity is positive then you should do so.

4. Assume sales and demand are 1,500 units, how much will the company make on the sale of the next unit (1,501^st)? Discuss which costs will change if the company makes and sells one more unit. Will the company make a profit on the unit if they sell at a price below your answer in 2? Please discuss your calculations and reference to Figure 1.

Direct labor ............ Advertising Factory supervision.. Property taxes, factory building .... Sales commissions .......... Insurance, factory ................. Depreciation, administrative office equipment ..... Lease cost, factory equipment ....... Indirect materials, factory ........... Depreciation, factory building. Administrative office supplies (billing) ... Administrative office salaries. Direct materials used (wood, bolts, etc.) ....... Utilities, factory ...... $118,000 $50,000 $40,000 $3,500 $80,000 $2,500 $4,000 $12,000 $6,000 $10,000 $3,000 $60,000 $94,000 $20,000 Cost Behavior Variable Selling or Administrative Cost Product Cost Indirect Cost Item Fred Direct $118.000 $118.000 $50,000 $50,000 40,000 3.500 $40,000 3,500 80,000 80,000 Direct labor..................... Advertising.............. --- Factory supervision............. Property taxes, factory building.... Sales commissions Insurance, factory....................... Depreciation, administrative office equipment.. Lease cost, factory equipment......... Indirect materials, factory ... Depreciation, factory building -........ Administrative oflice supplies......... 2,500 2,500 4,000 4,000 12,000 6,000 12,000 6,000 10,000 10,000 3,000 3,000 60,000 60,000 94.000 94.000 Administrative oflice salaries........ Direct materials used......... Utilities, factory.... . Total costs 20.000 20.000 $321.000 S182.000 $197.000 $212.000 Total at 2,000 Units Per Unit Sales Variable Costs Contribution Margin Fixed Costs Operating Income