Classic Cabinets has a factory that produces custom kitchen cabinets. It has multiple product lines. Materials and labor for the cabinets are determined by each job. To simplify the assignment, we will assume the following average costs.

The materials include $1,000 for the wood and other materials of $200. Both items listed are on a per job basis. It requires 20 hours of labor on average for a custom kitchen. The hourly rate is $10. The sales price will be set at a markup of 65%. The company estimates that it will have 16,000 direct labor hours in total for the kitchen cabinets. It assumes 800 units are sold on average per year. A breakdown of estimated yearly costs related to the kitchen cabinets follows:

Salaries- office & administrative $ 520,000

Salaries for factory personal $ 220,000

Office Rent $ 125,000 Factory Rent

$ 20,000 Utilities and Misc office expenses(based on units sold)

$ 20,000 Travel(based on units sold)

$ 24,000 Insurance - office

$ 12,000 Depreciation - office equipment

$ 40,000 Depreciation for factory equipment

$ 70,000 Advertising

$ 20,000 Sales commissions(based on units sold)

$ 45,000 Factory Property taxes

$ 10,000 Maintenance for factory equipment

$ 80,000

QUESTIONS:

1. Determine the cost of manufacturing one custom kitchen assuming the units given. Assume the MOH costs are allocated based on the direct labor hours per unit. Please show all calculations and round to the nearest dollar. I would recommend that you calculate the MOH per kitchen first. You should calculate an Overhead rate. Discuss other options for the activity base and the importance of the MOH allocation. Do multiple product lines impact the MOH allocation?

2. What are the variable costs for this product line? What are the fixed costs? I would recommend that you show a schedule for each area on a yearly basis. For the variable costs, also, show them on a per unit (800 units) How does a company identify each type of cost? Can a cost classification be changed over time? If yes, explain how. If no, explain why?

3. What is the Contribution Margin (CM) in total and per unit dollars, and CM% for the sale of 800 kitchen cabinets? Explain the importance of CM and how it can be used by companies to predict future income. Create some examples with numbers to show how it can be used.

4. Prepare a traditional Income Statement assuming a volume of 800 units. For the cost of goods sold, please use the per unit cost you calculated in #1. You do not have to prepare any additional schedules. I would use a similar format to exhibit 16-8 on page 737 or from your lecture notes. I recommend that you list out all operating expenses given above. Do not use just Selling and General/Administrative Expenses for your categories. Points will be lost by not listing out all period costs. You can ignore interest and income tax expense.

5. Prepare three CVP Income Statements using the following yearly volumes: 400, 800 and 1,200. Keep in mind how variable and fixed costs behave. The traditional income statement from #4 should be about the same net income as the 800 units for the CVP format.(use exhibit 20-12 page 893 as your example please note that it is missing a title and your numbers are for a year.) a) Calculate Break-even in units and sales $ for the company b) Calculate units and sales $ if the company wants a profit of $1,000,000. c) Margin of safety for 800 units. Discuss the importance of these calculations to a company. Fully discuss the differences between the traditional vs CVP format. Give examples supported by numbers of how you would use these calculations as the CFO of the company.

6. If the following changes were to be made, calculate a new CVP Income Statement: Direct Material costs decrease by 10%; fixed costs increase by 15% and sales price would increase by 5%. Assume you are selling the 800 units. Should the company consider these changes? Why or why not? Give some real examples of cost increases for fixed costs and decreases for direct materials that could be implemented for the business.

7. Explain what will happen to the MOH costs on a per unit basis if fewer units are sold. Could it impact per unit cost? (keep in mind the type of cost that MOH is) If another product line that would share the MOH costs was added, how would it impact the MOH costs? Should ABC be considered? Why? Fully discuss all pertinent points and show calculations needed to support your answers. I highly recommend including numbers to support the answer!!

8. To become more familiar with Financial Statements, understand the industry for this company and finding information through Edgar for SEC filings, please use Masco Corporation (SIC 2430) information to answer the following questions. The website to access the 10K is http://www.sec.gov/edgar/searchedgar/companysearch.html. You should use the 12/31/15 10K filing. This company is in the same industry as Classic Cabinets. a) Identify the companys product lines and give examples of each area that the company offers. Which line has the largest sales and profits? What is included in the other specialty product line? b) Answer the following questions related to the cabinet segment: is there a reliance on a small number of large customers? If, yes who are they? What does this mean to the company and investors? What type of warranty issues are there for this segment? International vs domestic sales how is the segment doing? Receivables and bad debt what are the areas of concern? c) Describe what has been happening in the cabinet market? What has been the financial impact? How is the company addressing these issues? Who are their competitors in this market? How are they positioning this segment for the future? Identify any other areas for this segment that would be important for an investor to understand. d) Make sure you review the Management Discussion and analysis and risk factors for the company. e) Apply the knowledge of the industry you acquired to make a list of recommendations(minimum of 2) that Classic Cabinets should implement and/or be aware of when running their business.