Question
Garys Custom Cabinets specializes in making handcrafted display cabinets. Over time, the owner of Garys Custom Cabinets, Gary Cavallo, has developed a strong reputation for
Garys Custom Cabinets specializes in making handcrafted display cabinets. Over time, the owner of Garys Custom Cabinets, Gary Cavallo, has developed a strong reputation for superior craftsmanship. Gary uses only hardwood materials and employs expert cabinetmakers. Currently, Gary and his staff do the most of their work with hand tools. Since there have been advances in woodworking technology, Gary is considering buying some state-of-the-art machines. Gary believes that these machines will not only reduce the amount of time the craftsmen spend on making cabinets but also would significantly reduce scrap materials. Under her current cost structure (i.e., without the new machines), Gary estimates that his fixed costs average $36,000 per month and the contribution margin ratio is 40%. If Gary acquires the woodworking machines, then his fixed costs would increase to $60,000 per month but the contribution margin ratio would also increase to 55%. A. What is Garys monthly break even revenue under her current cost structure? What would Garys monthly break even revenue be if she acquired new machines? B. Which cost structure would you recommend to Gary if his monthly revenue was $95,000? Which cost structure would you recommend to Gary if his monthly revenue was $150,000? C. Calculate the sales level at which Gary is indifferent (that is, has the same profit) under both cost structures.
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