| MAC 7200, CASE STUDY WEEK 6 |
| 1) BREAK EVEN POINT |
| A) IN UNITS |
| Sales Revenue | | 16.00 |
| Variable Materials | 3.00 |
| Variable Labor | 1.00 |
| Variable Overhead | 3.50 |
| Variable Marketing Costs | 1.50 |
| Total Variable Costs: | | 9.00 |
| CONTRIBUTION MARGIN PER UNIT | | 7.00 | 44% |
| Fixed overhead | 4.00 |
| Fixed Marketing costs | 2.00 |
| Total Fixed Costs | | 6.00 |
| BREAK EVEN POINT IN UNITS = FIXED COSTS / CONTRIBUTION MARGIN PER UNIT | | | EQUATION |
| | | | 16N - 9N - 90,000 = 0 |
| Fixed Costs: | 90,000.00 | | 7N = 90000 |
| CONTRIBUTION MARGIN PER UNIT | 7.00 |
| BREAK EVEN POINT IN UNITS | | 12,857 | N= |
| B) BREAK EVEN IN DOLLARS |
| UNITS BREAKEVEN | | 12,857 |
| SALES PRICES | | $ 16.00 |
| BREAK EVEN IN DOLLARS | | $ 205,712.00 |
| | | | | | | Combined |
| 2. SPECIAL ORDER ANALYSIS | | | | remainder of capacity @ $16 | | capacity & Special order |
| Income Statement (With Special Order) | special order volume @ $14 | 8,000 | | 12,000 | | 20,000 | | | | Income Statement at Normal Volume 15,000 and $16 | | 15,000 |
| Sales Revenue | | 112,000 | 8000 UNITS * $14 | 192,000 | | 304,000 | | | | Sales Revenue | | 240,000 |
| Variable Materials | 3.00 | 24,000 | 8000 UNITS * $3 | 36,000 | | 60,000 | | | | Variable Materials | | 45,000 |
| Variable Labor | 1.00 | 8,000 | 8000 UNITS * $1 | 12,000 | | 20,000 | | | | Variable Labor | | 15,000 |
| Variable Overhead | 3.50 | 28,000 | 8000 UNITS * $3.50 | 42,000 | | 70,000 | | | | Variable Overhead | | 52,500 |
| Variable Marketing Costs | 1.50 | 12,000 | 8000 UNITS * $1.50 | 18,000 | | 30,000 | | | | Variable Marketing Costs | | 22,500 |
| Total Variable Costs: | | 72,000 | | 108,000 | | 180,000 | | | | Total Variable Costs: | | 135,000 |
| Contribution Margin | | 40,000 | | 84,000 | | 124,000 | | | | Contribution Margin | | 105,000 |
| Fixed Costs: | irrelevant for special order | | | 90,000 | | 90,000 | | | | Fixed Costs: | | 90,000 |
| | | | | | | - 0 |
| NET INCOME (LOSS) | | 40,000 | | (6,000) | | 34,000 | | | | Net income | | 15,000 |
| | | | | benefit of accepting special order | | 19,000 |
| Accept the special order because net income would increase by $19,000. The primary reason why the special order increases net income despite a lowered sales price for the given unit purchase is because the company is able to reach max capacity of units produced and sold given that 8,000 units are guaranteed to be sold with the special order. Given that normal volume produced and sold each period is 15,000, the increase in total units sold increase by 5,000 and drives up the net income. |
| 3) MIRRORED SUNGLASSES |
| Sales Revenue | | 20.00 |
| Variable Materials | 6.00 | | double old price |
| Variable Labor | 1.00 |
| Variable Overhead | 3.50 |
| Variable Marketing Costs | 1.50 |
| Total Variable Costs: | | 12.00 |
| CONTRIBUTION MARGIN PER UNIT | | 8.00 | 40% |
| Fixed Costs: | 115,000.00 | | $90,000+$25000 | EQUATION |
| | | | | 20N - 12N - 115,000 = 0 |
| BREAK EVEN UNITS | | 14,375 | | 8N = 115000 |
| B) BREAK EVEN IN DOLLARS |
| UNITS BREAKEVEN | | 14,375 |
| SALES PRICES | | $ 20.00 |
| BREAK EVEN IN DOLLARS | | $ 287,500.00 |
| B) 11000 REGULAR, 7000 MIRRORED | 18000 UNITS TOTAL | | | COMPARISION AT 18,000 UNITS AT $16 |
| Sales - REGULAR | | 176,000.00 | 11,000 UNITS * $16 | 288,000 |
| Sales - MIRRORED | | 140,000.00 | 7,000 UNITS * 20 |
| TOTAL SALES | | 316,000.00 | | 288,000 |
| Variable Materials - REGULAR | 11,000 UNITS * $3 | 33,000.00 | 11,000 UNITS * $3 | 54,000 |
| Variable Materials - MIRRORED | 11,000 UNITS * $6 | 42,000.00 | 11,000 UNITS * $6 |
| Variable Labor | 18,000 UNITS * $1 | 18,000.00 | 18,000 UNITS * $1 | 18,000 |
| Variable Overhead | 18,000 UNITS * $3.50 | 63,000.00 | 18,000 UNITS * $3.50 | 63,000 |
| Variable Marketing | 18,000 UNITS * $1.50 | 27,000.00 | 18,000 UNITS * $1.50 | 27,000 |
| TOTAL VARIABLE COSTS | | 183,000.00 | | 162,000 |
| CONTRIBUTION MARGIN | | 133,000.00 | | 126,000 |
| TOTAL FIXED COSTS | | 115,000.00 | | 90,000 |
| NET INCOME | | 18,000.00 | | 36,000 |
| C. By reducing the plastic sunglasses units from the normal volume amount of 15,000 to 11,000 and adding 7,000 mirrored sunglasses, operating income actually decreases by $18K, if compared to 18,000 volume of plastic glasses |
| Despite the increase in sales price of the mirrored sunglasses, the mirrored sunglasses fixed and variable expenses cause operating income to decrease from only selling the plastic glasses |
| When selling both the plastic and mirrored sunglasses together, despite the mirrored sunglasses having a higher unit contribution margin compared to the plastic glasses, |
| the plastic sunglasses have a slightly higher contribution margin ratio 44% vs 40% which means theses sunglasses will be more profitable at volumes below 14,375 than the mirrored sunglasses. |
| The break-even point is also lower for the plastic sunglasses, which means that the plastic sunglasses will begin generating a profit sooner than the mirrored sunglasses. |
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