Question
Tuff Feet Pty Ltd manufactures Steel Cap work boots. Below is the product data for 2020: Annual Volume 64,000 Selling Price per unit $100 Variable
Tuff Feet Pty Ltd manufactures Steel Cap work boots. Below is the product data for 2020:
| Annual Volume | 64,000 |
| Selling Price per unit | $100 |
| Variable Manufacturing cost per unit | $36 |
| Annual Fixed manufacturing cost | $640,000 |
| Variable Marketing, Packaging and Distribution costs | $24 |
| Annual Fixed Administrative Costs | $320,000 |
Required:
- Calculate Contribution Margin per unit
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- Calculate Breakeven in units and Sales dollars
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Tuff feet are now considering outsourcing the packaging of the product for 2021, which would increase Variable Packaging costs by $8 per unit, and reduce Fixed Manufacturing costs by $120,000 per year.
- Calculate the breakeven units and Sales dollars under the new outsourcing arrangements.
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- Would you recommend Tuff Feet Pty Ltd outsource packaging? Consider Margin of Safety and Profit in your answer. Would the outsourcing arrangement increase or decrease the operating leverage of Tuff Feet, and what are the advantages or disadvantages of doing so?
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