Please answer the following questions:

1. TenAlpina is adding a new product line, which will add some new revenues and costs. Based on Guilias estimates, and assuming that the volumes for piton production and sales do not change, how many wall hammers would TenAlpina Tools have to sell in order the same annual gross margin (in dollars) as it would have if only piton were sold? That is, at what demand level for hammers would Guilia be indifferent (from a total profitability point of view) as to whether or not to add the new product line? Hint: You need to identify the incremental (relevant) revenues and costs for the hammer, and then compute the break-even point only for hammers.

2. Guilia wanted to look at financial risk from a breakeven and margin of safety point of view for the full operations. What is the breakeven point and margin of safety for TenAlpina? Assume the mix of 4,200 pitons for every 350 hammers will remain fairly

3. In question one you computed the number of hammers to sell to find a point of indifference for the demand to decide whether or not to add the hammers. Now, using Guilias estimates and assumptions for both piton and hammer production and sales, what would be the total annual aggregate effect on TOTAL gross margin of adding the production and sales of the new wall hammer product line?

4. 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 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	5.4%

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

BAB278 / 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 10 10 10 10 10- 7 $ 2,900 $ 8,800 $ 1,500 $ 900 $ 255 $ 14,355 $ 5,000 $ 19,355 Annual depreciation 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 $10.50 $ 57,500 per worker $ 14,355 $ 33,000 $ 29,808 $ 1.45 $ 0.18 $ 0.11 $ 7,200 $864 $10.44 $0.46 $0.14 BAB278 / 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 10 10 10 10 10- 7 $ 2,900 $ 8,800 $ 1,500 $ 900 $ 255 $ 14,355 $ 5,000 $ 19,355 Annual depreciation 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 $10.50 $ 57,500 per worker $ 14,355 $ 33,000 $ 29,808 $ 1.45 $ 0.18 $ 0.11 $ 7,200 $864 $10.44 $0.46 $0.14