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For this mini-case, you will be tasked with conducting some cost-volume-profit (and related) analysis, and will have an opportunity to practice communicating the results of

For this mini-case, you will be tasked with conducting some cost-volume-profit (and related)

analysis, and will have an opportunity to practice communicating the results of that analysis in

written form. Compile a document (PDF for

the final output, please) with your responses and work, and submit it via Canvas by the deadline

announced.

Kelly Kneppy owns a company that manufactures and sells camping equipment and outdoor gear.

Kelly's latest creation is the Bear-B-Gone, a tent constructed of Kevlar and reinforced steel mesh

that could theoretically protect campers (who hadn't followed appropriate food storage guidelines)

from bear attacks. Kelly believes the Bear-B-Gone offers many of the same desirable features as

other tents on the market, and that this extreme safety feature will make it one of the best-selling

tents in short order.

Kelly can make the Bear-B-Gone with one of two available technologies. The first is a labor-

intensive process, that if chosen will require $720,000 per year in fixed overhead costs, and the

following in variable costs of production per unit: direct materials of $45, direct labor of $65, and

overhead of $15. The second technology is a more automated (machine-dependent) process, that

if chosen will require $1,540,000 per year in fixed overhead costs, and the following in variable

costs of production: direct materials of $40 (savings due to less waste in the automated process),

direct labor of $5, and overhead of $60. Kelly believes she can sell the tent for $175.

1) What is Kelly's break-even point in units (and sales dollars) with the labor-intensive

production process? What is the break-even point in units (and sales dollars) with the more

automated process?

2) Which process is preferred if sales are expected to be 30,000 units? How about at 50,000

units? At what sales level would the two processes yield equivalent profit (round to the

nearest whole unit)?

3) Suppose possible sales are expected to range between 30,000 and 50,000 units as noted

above, and that production will equal sales (no beginning/ending inventory). Which

process has the greater

range

in profit? Why might this be a factor for Kelly to consider in

making her decision?

4) Assume sales were to fall at the midpoint of the projections above, 40,000 units. Following

up to the previous question, under which process would you say Kelly's profit is more

sensitive to changes in demand (sales)? Why? Does this make one of the options strictly

"better" than the other? Why or why not?

5) Suppose Kelly decided to go with the labor-intensive process. Suppose also that, in the first

year of operations, Kelly produces 70,000 tents and sells 55,000. What is the unit product

cost of the tents under variable costing? Under absorption costing? Round to two decimal

places as needed. If Kelly prepared GAAP-compliant financial statements in order to share

with potential investors, would her "over" production make her appear more or less

profitable (or no different) as compared to if production had been equal to sales at 55,000

units?

6) What other factors might affect Kelly's decision to focus on capital- vs. labor-intensive

processes? To get you started, consider things from earlier in this class

and

outside of a

strictly managerial accounting realm, such as taxes (or tax credits for certain business

operations), product quality, and public perception (using employees vs. automation). To

strengthen your response, you might wish to refer to a source or two from business or

popular press that illustrates how the factor(s) you're discussing affected a real

organization in a positive or negative manner.

7) Prepare a

brief

memo to Kelly, outlining your findings. You do not necessarily need to

include all of the "numbers" you've calculated above, but you should include anything that

you think would best convey the most important points of your analysis. Feel free to

include components that aren't part of the formal requirements in items #1-6, if you deem

them critical.

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