Your company has developed this new product called Squeaky Doors. Why wait for a
ID: 2579976 • Letter: Y
Question
Your company has developed this new product called Squeaky Doors. Why wait for a door that becomes squeaky when you can have new doors that squeak immediately.
The Marketing Manager is preparing their proposal to the CEO review meeting next week and asked you to help prepare the Break-Even analysis
The manager has supplied you with the following information about the new product:
Materials required
Oak door
$250 Per door
3 hinges
$24 The package of hinges includes 12 hinges and the total cost of the package is $24
Door handle (one handle)
$38 per handle
Squeaky juice and stain (I.5 gallons)
$31 Per gallon
The hinges come in a package of 12 items
Labor required to build the squeaky door
6 hrs
Labor rate is $21 per hour
The company also has the following monthly charges
Rent of production area $3,500
Insurance for area $1,500
Supervision $8,000
Depreciation of equipment $3,200
Advertising for new product $3,800
Other monthly charges $1,200
utilities (consider fixed) $1,900 $23,100
Selling price $750
Required
1 Prepare the break-even units for the project, show you work
2 Prepare an income statement to prove your break-even units
3 Assume the monthly target profit before taxes for this project is $16,000. Compute the number of units required to meet the target profit before taxes.
4 Prepare an income statement to prove the calculated units to achieve the number of units before taxes will equal the profit required.
5 The marketing research is indicating that there is an annual demand of 5,000 squeaky doors and the company will have 29% of the market. Explain if you were the CEO would you accept the new project, based on the data. Please explain
Oak door
$250 Per door
3 hinges
$24 The package of hinges includes 12 hinges and the total cost of the package is $24
Door handle (one handle)
$38 per handle
Squeaky juice and stain (I.5 gallons)
$31 Per gallon
Explanation / Answer
Answer 1. BEP (In Units) = Fixed Costs / Contribution per Unit Total Fixed Costs per Month = $23,100 Contribution per unit: Selling Price Per Unit 750.00 Variable Costs per Unit: Oak Door 250.00 Hinges - $24 X 3/12 6.00 Door Handle 38.00 Squeaky Juice & Stain - $31 X 1.50 Gallons 46.50 Labor - $21 X 6 Hours 126.00 466.50 Contribution per unit 283.50 BEP (In Units) = $23,100 / $283.50 BEP (In Units) = 81.48 or say 82 Units (approx.) Answer 2. Income Statement No. of Doors Sold 82.00 Sales Revenue 61,500.00 Less: Variable Costs - $466.50 X 82 Nos 38,253.00 Contribution Margin 23,247.00 Fixed Costs 23,100.00 Net Income 147.00 Net Income is Showing postive income due to rounding off of Units. Answer 3. BEP (In Units + Target Profit) = (Fixed Costs + Target Profit) / Contribution per Unit BEP (In Units + Target Profit) = ($23,100 + $16,000) / $283.50 BEP (In Units + Target Profit) = 137.9189 or say 138 Units (Approx.) Answer 4. Income Statement No. of Doors Sold 138.00 Sales Revenue 103,500.00 Less: Variable Costs - $466.50 X 138 Nos 64,377.00 Contribution Margin 39,123.00 Fixed Costs 23,100.00 Net Income 16,023.00 Net Income - Differnce of $23 is due to rounding off of Units. Answer 4. Annual Demand = 5,000 Doors Market Share of Company = 5,000 Doors X 29% = 1,450 Doors Income Statement No. of Doors Sold 1,450.00 Sales Revenue 1,087,500.00 Less: Variable Costs - $466.50 X 1450 Nos 676,425.00 Contribution Margin 411,075.00 Fixed Costs - $23,100 X 12 277,200.00 Net Income 133,875.00 As Net Income is Positive, the CEO should accept the new project.
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