Question
Turner Woodworking, LLC is a small family owned manufacturing business. They have three primary products: Birdhouse Porch swing Freestanding hammock All products are made within
Turner Woodworking, LLC is a small family owned manufacturing business. They have three primary products:
- Birdhouse
- Porch swing
- Freestanding hammock
All products are made within their existing on-site manufacturing facility.
Current selling prices are as follows:
Products | Selling price per unit |
Birdhouse | $58 |
Porch swing | $525 |
Freestanding hammock | $375 |
Material requirements for each product are as follows:
Birdhouse
Material | Quantity required per unit | Price |
Wood | 4 board feet | $3 per board foot |
Finishing products | 0.5 quarts | $6.20 per quart |
Porch swing
Material | Quantity required per unit | Price |
Wood | 40 board feet | $3 per board foot |
Hardware | 1 set | $25 per set |
Finishing products | 3 quarts | $6.20 per quart |
Chains | 28 feet | $1.85 per foot |
Freestanding Hammock
Material | Quantity required per unit | Price |
Wood | 12 board feet | $3 per board foot |
Hardware | 1 set | $25 per set |
Finishing products | 1 quart | $6.20 per quart |
Rope | 180 feet | $0.75 per foot |
Labor hours for each product are as follows:
Products | Labor Hours |
Birdhouse | 1.5 hours |
Porch swing | 3.5 hours |
Freestanding hammock | 6 hours |
The direct labor rate is $14 per hour. The company employs 8 workers in the manufacturing area. Each employee works an average of 160 hours per month for total monthly estimated direct labor hours of 1,280.
The manufacturing facility incurs the following monthly fixed costs:
Lease | $9,500 |
Utilities | $1,800 |
Equipment depreciation | $2,200 |
Supervisor salary | $3,000 |
Indirect materials | $780 |
Management allocates fixed manufacturing overhead costs by considering the dedicated square footage in the factory, equipment used in production, and direct labor hours required to make the product. Based on their analysis, they have arrived at the following allocation per product line:
Products | Fixed Cost Allocation Percentage |
Birdhouse | 15% |
Porch swing | 50% |
Freestanding hammock | 35% |
Requirements:
- Compute the variable cost for each product.
- Compute the contribution margin for each product.
- Compute the contribution margin ratio for each product.
- Compute the break-even point for each product assuming the existing allocation rate for fixed manufacturing overhead.
- Compute the target profit break-even point assuming that management wishes to earn the following profit levels:
Products | Target Profit |
Birdhouse | $6,000 |
Porch swing | $12,000 |
Freestanding hammock | $8,000 |
- During the month of August, the company manufactures and sells the following:
Products | Qty |
Birdhouse | 230 |
Porch swing | 90 |
Freestanding hammock | 88 |
Prepare a contribution margin income statement assuming that fixed selling and administrative expenses are $5,300.
- While management has extensive knowledge of woodworking and manufacturing, they have no background in accounting or finance. Prepare a memo to management (two-page minimum) to explain your findings from the CVP analysis performed above.
Be sure to include the following elements:
- Key findings related to contribution margin ratios, break-even points, and target profit.
- Using CVP analysis to better understand cost behavior and maximize profitability.
- Conclusions related to current staffing and future staffing considerations.
- Using CVP analysis to make better sales-mix decisions.
- Applying CVP concepts in scenarios of constrained resources such as labor or equipment.
- Implementing CVP to improve pricing decisions.
- Incorporating CVP into capital investment decisions.
Step by Step Solution
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Variable Cost for Each Product Birdhouse 34 board feet 62005 quarts 2120 Porch swing 340 board feet 251 set 6203 quarts 18528 feet 16925 Freestanding Hammock 312 board feet 251 set 6201 quart 075180 f...Get Instant Access to Expert-Tailored Solutions
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