I need help with question D.

Colorall produces markers in a variety of colors. Their boxes of markers are primarily sold at department stores across the country. The cost of manufacturing and marketing their markers, at their normal factory volume of 3,000,000 boxes of markers per month, is shown in the table below. Colorall sells their boxes of markers for $5.00 each. Colorall is making a small profit, but they would prefer to increase their Operating Income.

Volume

3,000,000

Sales

15,000,000

Variable cost4

Variable cost total

12,000,000

Contribution Margin

3,000,000

Fixed cost

0.7

Fixed cost total

2,100,000

Operating Income

900,000

Manufacturing costs:

Variable materials

1.75

variable labor

1.2

variable overhead

0.8

fixed overhead

0.5

Marketing Costs:

Variable marketing

0.25

fixed marketing

0.2

Colorall is thinking of cutting costs by switching to a different material supplier. Their variable material costs would decrease by 50% (only variable material costs - not all variable costs). The quality of the ingredients is lower, so Colorall estimates that their additional fixed scrap costs related to the ingredient quality would be $1,500,000 per month. They would not change the pricing of their boxes of markers.

Note: Use the initial data provided for all questions. Ignore the special sale and larger box data from Parts 2 & 3.

A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, costs and profits of using the different raw material (ingredient) supplier. (At normal volume.)

B) What is the break-even point in units? (Show your calculations.)

C) What is the break-even point in sales dollars? (Show your calculations.)

D) If their sales end up decreasing because of the change in quality, how much of a reduction in sales (dollars and units) could Colorall handle and still keep their net operating income the same as before the supplier change? Show your data in a Contribution Margin Income Statement.

E) What are the potential impacts - both Qualitative and Quantitative - of the material supplier change? If you had to make the decision of whether to switch suppliers or not, what would you do? Why?