Issues:

Frank (sales manager) at current cost will not sell

Assume S,G, and A is Iixed
Assume operating at capacity Ior A2B
1 Current contribution margin
2 Current breakeven quantity at $ 8.00 Iactory selling price
3 IdentiIy product and period costs
4 Operating leverage at $ 8.00
5 What volume would have to be sold at the $14.70 Iactory price in order Ior Monroe to be as well oII as it would be iI it sold 50,000 units at $8.00
6 II the capacity Ior producing the A2B timer component is in Iact limited, and thereIore each sale oI the household time will eliminate the sale oI an
7 II, as Jim says, neither $14.70 nor $8.00 represents "the cost" oI the new timer, how would a better Iigure be computed?
Approaches 1 pasL breakeven
or would operate two separate lights over 24 hour period.
4374e Cl4. C425,3 A
1) Client made clocks
2) ShiIted to timing devices
3) Current sales $50 million
4) Features that timers would not turn on at same time over 48 hours
8reakLven llxed CosLs/ConLrlbuLlon Margln per unlL
Cperat|ng Leverage ConLrlbuLlon Margln/CperaLlng lncome
$ 14.68 Iactory and $28.76 at retail
Proposes costing based on variable overhead oI $8.00 Iactory and $16.00 retail projected at 50,000 it
Tom (controller) not Iull but will increase sometime
Jim - owner - sell Ior $14.70 Iactory and &29.40 as product is superior
Additional investment $20,000 in equipment and $50,000 in advertising
will modiIy existing unit - Model A2B - , their biggest seller
AnalyslsAssumlng unlmlLed capaclLy for componenLs and produ
Model A2B Addl Costs New Timer New VC LsL volume 30000
Direct Material $1.33 0.36 $ $1.69 $1.69 8reakeven aL $800new 1lmer Cnly
Direct Labor 0.746 1.69 2.43 2.43
Variable Supplies 0.082 0.10 0.18 0.18 lncremenLal llxed CosLs 30000 $
Overhead 300 2.238 7.30 1.99 unlL ConLrlbuLlon Margln $170
Total costs $4.40 $11.60 $6.30
S, G & A 15 0.66 1.74 1.00 8L unlLs aL $800 29412
BeIore proIit $5.06 $13.34 $7.30 Margln Saf
ProIit 10 0.51 1.33 0.70 Margln of SafeLy aL $800 41 20388
Selling price $5.57 $14.67 $8.00
Retail MU 5.57 $14.67 $8.00 lncremenLal roflL ConLrlbuLlon 33000 $
Retail Selling Price $11.13 $29.35 $16.00
ayback erlod 37
Selling Price $5.57 $14.67 $8.00 volume Lo be as well off aL $1467 selllng prlce
Less: Variable Costs ConLrlbuLlon Margln [ $800 $170
M, L, Supplies 2.16 $ 4.30 $ $4.30 volume 30000
V OH 82 0.61 1.99 1.99 ConLrlbuLlon Margln 83000 $
Total Variable $2.77 6.30 6.30 $ Margln [ $1467 $838
Contribution Margin $2.79 $8.38 $1.70 CuanLlLy [ $1467 Lo achleve same margln 10148
Less: Fixed Costs
ManuIacturing OH 1.63 5.30 - lncremenLal ConLrlbuLlon aL $1467 30000
S,G, & A 0.66 1.74 1.00 unlL conLrlbuLlon margln $838
Total Fixed 2.29 7.04 1.00 ConLrlbuLlon Margln 418788 $
ProIit $0.51 $1.33 $0.70 AdverLlslng (30000)
lncremenLal ConLrlbuLlon 368788 $
Overhead rate
300 oI direct labor-Iully absorbed 8reakeven aL 1467 lC 30000 $
82 oI direct labor-variable CM $838
unlLs aL $1467 3970
unlLs 8ased on CompeLlLors rlce
unlLs
AL compeLlLon prlce per unlL
Sears 999 $
varlable CosLs (630)
ConLrlbuLlon Margln 369 $
AdverLlslng CosLs (100)
neL ConLrlbuLlon 3 $
SenslLlvlLy Analysls
Contribution
Price Units Margin Contribution
lrank $800 30000 $170 $83000
CompeL $999 40000 $369 $147670
!lm $1467 20000 $838 $167313
CperaLlng leverage rlce $800 8L 29412 unlLs
10000 20000
ConLrlbuLlon Margln 17000 $ 34000 $
CperaLlng lncome (33000) $ (16000) $
CperaLlng Leverage (032) (213)
lncrease ln sales 100
leverage 32
lncrease ln lncome 32
AcLual lncrease ln lncome 32
Assumlng planL operaLlng aL capaclLy for A28
unlLs
CM unlLs LosL
w/ uepreclalLon ConLrlbuLlon losL on 30000 A28 279 $ 30000 139300 $
30400 $ Calned on new producL aL $800 170 $ 30000 (83000) $
$170 Calned on new producL aL $1467 838 $ 30000 418788 $

29647 MusL cover losL margln so lL becomes an opporLunlLy cosL
Margln Saf
20333 41 Selllng prlce 800 $
varlable cosLs (630)
CpporLunlLy (279)
LosL conLrlbuLlon (109) $
209 days
1o generaLe same conLrlbuLlon as wlLh A28 [ $800
Addl llxed CosLs (AdverLlslng) + LosL A28 ConLrlbuLlon
new producL conLrlbuLlon margln
$30000 + $139300 111471 unlLs
unlLs $170
unlLs 1o generaLe same conLrlbuLlon as wlLh A28 [$1467
$30000 + $139300 22623 unlLs
$838
Selllng prlce 1467 $
varlable cosLs (630)
CpporLunlLy (279)
AddlLlonal conLrlbuLlon 338 $
unlLs 10148
1oLal conLrlbuLlon 36628
30000 AdverLlslng (30000)
1oLal neL conLrlbuLlon 6628
499300 $ er unlL 063 $
(314912) roflL margln 443
184388 $
(30000) unlLs 30000
134388 $ 27 1oLal neL conLrlbuLlon 279000
AdverLlslng (30000)
neL conLrlbuLlon 229000
er unlL 438 $
roflL margln 3121
/;ertising Profit ROS
(30000) $33000 873
(30000) $97670 2444 Assumlng a markeL of 30000 unlLs aL whaL prlce musL Lhe producL be
(30000) $117313 4004 sold Lo yleld Lhe same conLrlbuLlon as before new producL was lnLroduced
$30000 + $139300 30000
?
29412 40000 60000 ConLrlbuLlon Margln 379
30000 $ 68000 $ 102000 $ varlable CosLs 630
$ 18000 $ 32000 $ rlce 1009 $
0 378 196 8evenue 304412 $
varlable CosLs (314912)
30 LosL ConLrlbuLlon from A28 (139300)
378 neL ConLrlbuLlon 30000 $
189 Less Addl AdverLlslng (30000)
189 neL roflL $

unlLs