Shortly after reading the article Greg received a call from one of his Japanese
ID: 2456426 • Letter: S
Question
Shortly after reading the article Greg received a call from one of his Japanese suppliers, a provider of the wheel assemblies for the skateboards (both the standard model and longboard). Greg has been purchasing the wheel aseemblies from the supplier who has been providing the assemblies at a very low price. The supplier informs Greg that there is significant uncertainty in the tariffs that are required because the outcome of the Trans Pacific Partnership (TPP) trade deal is in question. The Japanese supplier informs Greg that the increase in tariff and duties on shipping will run $2.00 per wheel assembly for both the standard board and longboard. Remember each board requires two wheel assemblies.
Greg thinks about how to proceed. He opens his contact list on his computer and begins to call other known suppliers. After serveral hours on the phone negotiating price and delivery terms with alternative suppliers, Greg compiles cost data for a U.S. Supplier.
The U.S. supplier has higher costs in direct materials of $.75 per wheel assembly for the standard model and $1.00 per wheel assembly for the longboard. In addition the wheel aseembles provided by the U.S. supplier will require an extra processing step before installation which will ad $.50 of direct labor cost per board for both models. A new machine will also need to be purchased to perform this extra operation, os Greg will incur an additional $200 in costs per month in fixed depreciation expense.
Greg would like you to evaluate the two alternatives on a monthly basis to determine how to move forward. He has assembled the following monthly data about current operations.
Total common fixed costs are $7000.
Required
1. The first income statement should calculate the monthly profitability if Greg continues to purchase the wheel assembles from the Japanese supplier under the new tariff scheme and should reflect the increase in costs described above. The second income statement should calculate the profitability if Greg purchases the wheel assemblies from the U.S. supplier and should reflect the increase in costs described for that scenario.
2. Calculate the breakeven sales dollars under both alternatives.
I tried number 1 but feel like I did it totally wrong, so I havent continued to number 2 because of it.
Standard Longboard Unit Sales 300 80 Selling Price P/ Unit $77.50 $125 Direct Materials per unit 20.00 32.00 Direct labor cost per unit 26.00 43.00 Other variable costs per unit 9.50 11.50Explanation / Answer
Answer for question no.1:
Income statement if the Japanese supplier is continued:
Income statement if the U.S supplier is chosen:
Answer for question no.2:
Break even sales in dollrs is the value of sales where contribution is equal to fixed costs.
Fixed costs =$7,000
Contribution to be earned is proportionately divided between ($7,000*$18)/52.5 +($7,000*$34.5)/52.5
=$2400 to be earned by standard boards and $4,600 to be earned by the sale of long board.
Standard units to be sold to earn $2,400 contribution =$2,400/$18 =133.33 units.
Sales value of 133.33 units rounded to 134 units of standard board =134*$77.50 =$10,385.----------(A)
Long boards to be sold to earn $4,600 contribution =$4,600/$34.50 =133.33 units.
Sales value of long boards at 133.33 units rounded to 134 units =134 *125 =$16,750---------(B)
Total sales =A+B
=$27,135.
Note: This is on the assumption that Long board sales can be increased without any limitation.
If there is restriction on sale of Long boards to 80, then balance contribution is to be earned by the sale of standard boards.
Therefore additional units to be sold of standard board =((134 units - 80 units) *34.50)/18=103.5 units rounded to 104 units.standard boards to be sold extra.
Therefore value sales value of additional boards of standard =104 units*$77.50 =$8,060-------(C).
Therefore brake even sales = A+80*125+C
=$28,445.
Break even sales if U.S supplier is opted:
Break even sales in dollrs is the value of sales where contribution is equal to fixed costs.
Fixed costs =$7,200
Contribution to be earned is proportionately divided between ($7,000*$20)/56 +($7,000*$36)/56
=$2571.43 to be earned by standard boards and $4,628.57 to be earned by the sale of long board.
Standard units to be sold to earn $2,571.43 contribution =$2,571.43/$20 =128.57 rounded to 129 units
Sales value of 129 units of standard board =129*$77.50 =$9,997.50.----------(A)
Long boards to be sold to earn $4,628.57 contribution =$4,628.57/$36 =128.57 units.rounded to 129 units..
Sales value of long boards at 129 units =129 *125 =$16,125--------(B)
Total sales =A+B
=$26,122.50.
Note: This is on the assumption that Long board sales can be increased without any limitation.
If there is restriction on sale of Long boards to 80, then balance contribution is to be earned by the sale of standard boards.
Therefore additional units to be sold of standard board =((129 units - 80 units) *36)/20=88.2 units of standard boards to be sold extra. Therefore value sales value of additional boards of standard =88.2 rounded to 89 units*$77.50 =$6,897.50-------(C).
Therefore brake even sales = A+80*125+C
=$27,282.50
Particulars Standard Longboard Unit Sales (X) 300 80 Selling Price P/ Unit (A) $77.50 $125 Variable costs Direct Materials per unit $20.00 $32.00 Direct labor cost per unit $26.00 $43.00 Other variable costs per unit $9.50 $11.50 Transit tariff $4.00 $4.00 Total variable costs (B) $59.50 $90.50 Contribution per unit C=A-B $18.00 $34.50 Contribution =X*C $5,400.00 $2,760.00 Total contribution $8,160.00 Minus:Common fixed costs 7000 Net income $1,160.00Related Questions
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