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 $400 per set. Dial can increase capacity by 1,000 units to 3,000 units but must pay $50,000 to do . Annual cost data for the production of 2,000 sets are classified as follows: Selling or Administrative Cost Behavior Product Cost Cost Item Variable Fixed Cost Direct Indirect Direct labor. $118,000 $118,000 Advertising S50,000 $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 Lcase cost, factory cquipment 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 S321,000 S182.000 $197.000 $212.000 S212.000 $94.000 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 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 1)For the following questions, please use the information on pages 1 and 2 to help support your decisions. Please document your answer in a clear, concise way and reference any numbers that were used to make your decision. Each question is independent and refers to the original data unless specified otherwise. For each question, please use up to 100 words. Each question is worth 5 points for a total of 20 points. 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. Total at 2,000 Units Per Unit Sales Variable Costs Contribution Margin Fixed Costs Operating Income B. Do total fixed costs change for a relevant range of zero to 2,000 units? Why or why not? 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. C. 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 $50,000. 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 at the normal price 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. D. Assume sales and demand are 1,000 units, how much will the company make on the sale of the next unit (1,001st)? Discuss which amounts on the income statement will change if the company makes and sells one more unit. Please discuss your calculations and reference to Figure 1
