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Book1 Group Act5110

The document compares a high-end set and an economical set. It finds that the high-end set breaks even at 1078 units per year with a contribution margin of $1,125 per unit and 35% ratio, while the economical set breaks even at 2707 units per year with a $449 contribution margin per unit and 45% ratio. It also analyzes keeping or dropping a washer/dryer combo product line, finding that total sales and net income are higher when keeping all product lines, supporting the recommendation to do so despite higher costs under that option.

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141 views9 pages

Book1 Group Act5110

The document compares a high-end set and an economical set. It finds that the high-end set breaks even at 1078 units per year with a contribution margin of $1,125 per unit and 35% ratio, while the economical set breaks even at 2707 units per year with a $449 contribution margin per unit and 45% ratio. It also analyzes keeping or dropping a washer/dryer combo product line, finding that total sales and net income are higher when keeping all product lines, supporting the recommendation to do so despite higher costs under that option.

Uploaded by

SAM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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High-End 

Set Economical Set
Sales price     $3,500  per unit     $1,000
Labor    $875  per unit    $250
Materials    $1400  per unit    $300

Direct fixed costs     $25,000  per month    $16,500


Allocated fixed costs     $85,000  per month    $85,000

High-End Set Economical Set
Sales price   $  3,500  per unit   $  1,000 

Labor  $   875   per unit  $   250 


Materials  $  1,400   per unit  $   300 

Total Variable costs  $  2,275   per unit  $   550 

Direct fixed costs   $ 25,000   per month  $  16,500 

Allocated fixed costs   $ 85,000   per month  $  85,000 

Total Fixed costs  $110,000   per month  $101,500 

Break even Break even
Contribution margin $  1,125  per unit $   449
Contribution margin $1,320,000   per year  $1,218,000 
Contribution margin ratio
35% 45%
Break Even Units 1078  per year 2707

To earn $500,000 To earn $300,000
Contribution margin $1,820,000   per year $1,518,000 
 Units (Annual) 1,486   per year 3,373 

Q2
Unit costs Year 1 Year 2 Year 3
Sales price  $ 2,250   $ 2,250   $ 2,250 
Material cost   $  795   $  795   $  811 
Labor cost   $  595   $  595   $  607 
Total Variable costs  $ 1,390   $ 1,390   $ 1,418 
Contribution margin (u
nit)  $   860   $  860   $  832 
CM ratio 38.22% 38.22% 36.99%

Timeline (Annual) Present 0 Year 1 Year 2


Revenue  $358,299 $651,453
Material cost  $127,200 $230,550
Labor cost  $95,200 $172,550
Total Direct Variable co
sts $222,400 $403,100
Initial cash outlay $150,000
Direct Fixed Costs  $249,000 $249,000

Total direct fixed costs $150,000 $249,000 $249,000


Contribution margin $136,950 $249,000
CM ratio 38.22% 38.22%
Total cash in (out) ($150,000) ($113,101) ($647)
PV Factor (rate of retur
n = 10%) 1 0.90909 0.82645
NPV  ($150,000) ($102,819) ($534)
IRR 
Units (Break-
even Year 2) 160 290

Summary & recommendation:


Negative NPV points to rejecting investment
IRR lower than cost of capital of 8% points to rejecting the investment
Qualitative factors should be considered: Strategic importance to product portfolio, Leader in industry & innovation
Recommend to go forward with investing in product line for washer/dryer combination product line

High-End Set  Economical Set   W/D Combo 


 Sales   $4,700,000     $4,060,000    $880,000  
 Labor   $(1,250,000)   $(1,015,000)   $(235,000)
 Materials   $(1,885,000)   $(1,220,000)   $(315,000)
 Direct fixed costs    $(325,000)   $(220,000)   $(250,000)

 Allocated fixed costs    $(650,000)   $(650,000)   $(650,000)

 Net Income    $590,000   $955,000   $(570,000)

Option 1: Keep all product


lines

 High-End Set   Economical Set   W/D Combo 


 Sales $4,700,000 $4,060,000 $880,000
 Labor ($1,250,000) ($1,015,000) ($235,000)
 Materials ($1,885,000) ($1,220,000) ($315,000)
 Direct fixed costs  ($325,000) ($220,000) ($250,000)

 Allocated fixed costs  ($650,000) ($650,000) ($650,000)


 Net Income $590,000 $955,000 ($570,000)

Option 2:Drop Washer/Dryer combo product line


 High-End Set   Economical Set  Total
 Sales $4,700,000 $4,060,000 $8,760,000
 Labor ($1,250,000) ($1,015,000) ($2,265,000)
 Materials ($1,885,000) ($1,220,000) ($3,105,000)
 Direct fixed costs  ($325,000) ($220,000) ($545,000)

 Allocated fixed costs  ($1,046,233) ($903,767) ($1,950,000)


 Net Income $590,000 $955,000 $895,000

Option 1 Option 2 Differential Amount 


 Sales $9,640,000 $8,760,000 $880,000
 Labor ($2,500,000) ($2,265,000) ($235,000)
 Materials ($3,420,000) ($3,105,000) ($315,000)
 Direct fixed  costs  ($795,000) ($545,000) ($250,000)

 Allocated fixed costs  ($1,950,000) ($1,950,000) $0


 Net Income $975,000 $895,000 $80,000
 per unit  
 per unit
 per unit

 per month
 per month

 per unit  

 per unit
 per unit

 per unit SUMMARY OF FINDINGS

High-End Set:
 per month At break-even the contribution margin $1,125 per unit, $1,320,000 per year with a CM ratio of 35%

 per month To break-even 1078 units must be built per year

 per month To make a $500,000 margin, 1,486 units need to be built per year

  per unit Economical Set:


 per year At break-even the contribution margin $449 per unit, $1,218,000 per year with a CM ratio of 45%
This model has a higher CM ratio
 per year To break-even 2707 units must be built per year
To make a $300,000 margin, 3,373 units need to be built per year

 per year
 per year

Year 4 Year 5
 $ 2,250   $ 2,250 
 $  827   $  844 
 $  619   $  631 
 $ 1,446   $ 1,475 
 $  804   $  775 
35.73% 34.44%

Year 3 Year 4 Year 5


$716,599 $824,089 $988,906
$258,677 $303,552 $371,211
$193,601 $227,187 $277,824

$452,278 $530,739 $649,035

$249,000 $249,000 $249,000

$249,000 $249,000 $249,000


$265,046 $294,417 $340,589
36.99% 35.73% 34.44%
$15,321 $44,349 $90,872

0.75131 0.68301 0.62092


$11,511 $30,291 $56,424 ($155,127)
-12.84%

319 367 440

tfolio, Leader in industry & innovation


mbination product line

Total
  $9,640,000
  $(2,500,000)
  $(3,420,000)
  $(795,000)

  $(1,950,000)

  $975,000 

Total
$9,640,000
($2,500,000) Labor, Materials, and Direct Fixed costs are higher for Option 1 – supports dropping the washer/dry
($3,420,000)
($795,000)

($1,950,000)
$975,000

Differential Analysis Summary: Sales and net income are up supporting our recommendation to kee
We believe the costing methodology is appropriate
Option 1 is:
Higher
Higher
Higher
Higher

-
Higher
er year with a CM ratio of 35%

year with a CM ratio of 45%


ports dropping the washer/dryer combo product line

ng our recommendation to keep all product lines. Even though direct and allocated fixed costs are higher supporting option 2, this is outw
er supporting option 2, this is outweighed by the bottom line results of higher net income.

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