Advanced Managerial Accounting Case Study

Each question refers to the same initial data. Treat each question separately. Ignore income taxes. Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. Use only the data provided with this case study – not any data from prior weeks.

Data for all questions: Ban Oak Corp produces plastic sunglasses. Their sunglasses are sold at many mall kiosks. The cost of manufacturing and marketing their sunglasses, at their normal factory volume of 15,000 pairs of sunglasses per month, is shown in the table below. These sunglasses sell for $16 each. Ban Oak Corp is making a small profit, but would prefer to increase profitability.

(Note: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.)

Question 1: What is the break-even point? A) In units? B) In sales dollars?

Question 2: A large department store has offered to purchase 8,000 sunglasses (one time) if the price was lowered to $14 per pair. Ban Oak Corp’s maximum capacity is 20,000 units. A) Based on the cost data provided, what would be the impact of the special sale on sales, costs, and operating income if Ban Oak Corp accepted this sale? Use a contribution margin income statement to show your results. B) Do you think Ban Oak Corp should accept this sale? Support your decision with evidence and analysis.

Question 3: Research has shown that there is a need for mirrored sunglasses on the market. Ban Oak Corp would be able to produce mirrored sunglasses on their existing assembly line if they purchased a new machine to add the reflective coating. This would increase fixed overhead costs by $25,000 per month (still based on normal production volume of 15,000 units). The variable materials costs (not all variable costs – just variable material costs) for the mirrored sunglasses would also be double the cost of the variable materials for the regular sunglasses. Maximum production for both types of sunglasses together would still be 20,000 units because the same assembly line would be used. The mirrored sunglasses would sell for $20 each. A) What would be the break-even point if Ban Oak Corp only sold mirrored sunglasses? B) Create a contribution income statement for a month in which Ban Oak Corp sold 11,000 regular sunglasses, and 7,000 mirrored sunglasses. C) Explain, in your own words, how the changes to fixed and variable costs for the mirrored sunglasses impacts profitability.