Gross margin is one measure of profitability. Before adding the wall hammer, pitons were the only product the company manufactured. The financial results for selling $4,200$ pitons per month appear below $($Table $1)$ and show a gross margin of $5,4\%.$ Now, assuming the rock hammers have been added and employing the estimates and assumptions provided in the case, what will be the unit gross margins for EACH of the two product lines? $($You need to review cost allocation concepts from previous sessions$)$

Table $1$

Volume

$50,400$

Revenue

$$529,200$

Materials

$$73,080$

Direct Labor

$$345,000$

Factory Overhead

Supplies

$$5,544$

Power

$$29,808$

Depreciation

$$14,355$

Occupancy

$$33,000$

Total Manufacturing costs

$$500,787$

Gross Margin

$$28,413$

$5\mathrm{.}4\%$

Based on your analysis, would you recommend expanding the product line? Why?

Exhibit $3$: Current and Estimated Cost and Revenue Data Current Results Average monthly piton demand Selling price per piton Annual worker labor cost $($fully$-$loaded, including benefits$)4,200$ units Annual machine and tool depreciation $($existing machines$)$ Annual occupancy cost $($including building lease$)$ Annual lighting$/$heating$/$utilities cost Direct material cost per piton Variable energy cost per piton Variable supplies cost per piton Annual administrative costs Estimated Information Increase in fixed utility costs due to new machine Material costs $($per hammer$)$ Utility costs per hammer Supply costs per hammer $$10\mathrm{.}50$ $ $57,500$ per worker $ $14,355$ $ $33,000$ $ $29,808$ $ $1\mathrm{.}45$ $ $0\mathrm{.}18$ $ $0\mathrm{.}11$ $ $7,200$ $$864$ $$10\mathrm{.}44$ $$0\mathrm{.}46$ $$0\mathrm{.}14$ BAB$278/$ MAY $2015$ Exhibit $2$: Depreciation Schedule, Including Estimate for Injection Molding Machine Subtotal Machine type Cold roll and cut Oven & drop$-$ forge Bore Deburr and polish Package Injection mold Total $($making just pitons$)$ Cost $$29,000$ $$88,000$ $$15,000$ $$9,000$ $$2,550$ $$143,550$ $$35,000$ $$178,550$ Life $1010101010-7$ $ $2,900$ $ $8,800$ $ $1,500$ $ $900$ $ $255$ $ $14,355$ $ $5,000$ $ $19,355$ Annual depreciation