CASES

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.

Case 4-55 Ethics and a Cost-Volume-Profit Application

Danna Lumus, the marketing manager for a division that produces a variety of paper products,

is considering the divisional manager's request for a sales forecast for a new line of paper napkins.

The divisional manager has been gathering data so that he can choose between two different

production processes. The first process would have a variable cost of $10 per case produced

and total fixed cost of $100,000. The second process would have a variable cost of $6 per case

and total fixed cost of $200,000. The selling price would be $30 per case. Danna had just completed

a marketing analysis that projects annual sales of 30,000 cases.

Danna is reluctant to report the 30,000 forecast to the divisional manager. She knows that

the first process would be labor intensive, whereas the second would be largely automated with

little labor and no requirement for an additional production supervisor. If the first process is

chosen, Jerry Johnson, a good friend, will be appointed as the line supervisor. If the second process

is chosen, Jerry and an entire line of laborers will be laid off. After some consideration,

Danna revises the projected sales downward to 22,000 cases.

She believes that the revision downward is justified. Since it will lead the divisional manager

to choose the manual system, it shows a sensitivity to the needs of current employeesa sensitivity

that she is afraid her divisional manager does not possess. He is too focused on quantitative

factors in his decision making and usually ignores the qualitative aspects.

Required:

1. Compute the break-even point in units for each process.

2. Compute the sales volume for which the two processes are equally profitable. Identify the

range of sales for which the manual process is more profitable than the automated process.

Identify the range of sales for which the automated process is more profitable than the manual

process. Why does the divisional manager want the sales forecast?

3. Discuss Danna's decision to alter the sales forecast. Do you agree with it? Is she acting ethically?

Is her decision justified since it helps a number of employees retain their employment?

Should the impact on employees be factored