This case study reviews fixed vs variable costs, breakeven analysis, cost allocations, rates and assigning costs to products. 

MAC 7200 Project: Breakeven Analysis and Business Decisions

Each question refers to the same initial data. Treat each question separately. Ignore income taxes. Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. Use only the data provided with this case study – not any data from prior weeks.

Data for all questions: Ban Oak Corp produces plastic sunglasses. Their sunglasses are sold at many mall kiosks. The cost of manufacturing and marketing their sunglasses, at their normal factory volume of 15,000 pairs of sunglasses per month, is shown in the table below. These sunglasses sell for $16 each. Ban Oak Corp is making a small profit, but would prefer to increase profitability.

(Note: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.)

Question 1: What is the break-even point? A) In units? B) In sales dollars?

Question 2: A large department store has offered to purchase 8,000 sunglasses (one time) if the price was lowered to $14 per pair. Ban Oak Corp’s maximum capacity is 20,000 units. A) Based on the cost data provided, what would be the impact of the special sale on sales, costs, and operating income if Ban Oak Corp accepted this sale? Use a contribution margin income statement to show your results. B) Do you think Ban Oak Corp should accept this sale? Support your decision with evidence and analysis.

Question 3: Research has shown that there is a need for mirrored sunglasses on the market. Ban Oak Corp would be able to produce mirrored sunglasses on their existing assembly line if they purchased a new machine to add the reflective coating. This would increase fixed overhead costs by $25,000 per month (still based on normal production volume of 15,000 units). The variable materials costs (not all variable costs – just variable material costs) for the mirrored sunglasses would also be double the cost of the variable materials for the regular sunglasses. Maximum production for both types of sunglasses together would still be 20,000 units because the same assembly line would be used. The mirrored sunglasses would sell for $20 each. A) What would be the break-even point if Ban Oak Corp only sold mirrored sunglasses? B) Create a contribution income statement for a month in which Ban Oak Corp sold 11,000 regular sunglasses, and 7,000 mirrored sunglasses. C) Explain, in your own words, how the changes to fixed and variable costs for the mirrored sunglasses impacts profitability.

Case Study

(CM) = (Selling price per unit – variable cost per unit)

correct

0

Contribution Margin

a) Break even in units

Total overhead fixed costs

Total fixed marketing costs

Total Fixed Costs

b) BREAK EVEN IN SALES DOLLARS

break even in dollars =

Analysis

Units

Units

Sales

Sales

Less: Variable costs Less: Variable costs
Variable material cost @3.00

Variable labor @ 1.00

Variable labor @ 1.00 7000

Variable Overhead @ 3.50

Variable Overhead @ 3.50

Variable Marketing costs @1.50

Variable Marketing costs @1.50

Contribution Margin

Contribution Margin

Less: Fixed Costs Less: Fixed Costs
Fixed Overhead Costs @4.00

Fixed Marketing Costs @2.00 N/A Fixed Marketing Costs @2.00

Net Operating Income

Net Operating Income $ – 0

																																																																																																																																																																																																									Esra Surmen
Break-even point in units = (total fixed costs)/contribution margin
			Contribution Margin
Break-even point in dollars = (total fixed costs)/Contribution Margin Ratio
Contribution margin ratio (CMR) = CM/Selling price per unit
Question One
	a)		Break even in units
Selling Price per unit = $16
Variable Cost per unit = $9
Contribution Margin = (S.P-V.C) = ($16 – $9) =	$7
	Total overhead fixed costs	$ 60,000.00
	Total fixed marketing costs	$ 30,000.00
	Total Fixed Costs	$ 90,000.00
Therefore break even in units = $90,000/7 =	12857.1428571429		correct
break even in units = 12,857 sunglasses
	b)		BREAK EVEN IN SALES DOLLARS
CMR = $7/$16 =	0.4375
	break even in dollars =	$ 205,714.29
Question Two
	Analysis	Accept the offer $	Manufatures to its maximun capacity $
		Units	8,000	20,000
		Sales	112,000.00	300,000.00	I think you took the average of 16 + 14 and used $15 did not take in to consideration different sales volumes
		Less: Variable costs
	Variable material cost @3.00	24000	60000
		Variable labor @ 1.00	8000	20000
		Variable Overhead @ 3.50	28000		7000
		Variable Marketing costs @1.50	12000	30000
40,000.00	120,000.00
		Less: Fixed Costs
	Fixed Overhead Costs @4.00	32000	80000	Fixed costs stay the same at $90,000 at all levels
		Fixed Marketing Costs @2.00		N/A	40000
		Net Operating Income	$ 8,000.00		$ – 0
Conclusion: Ban Oak Corp. should accept this sale since it offers the more profit as compared to the maximum capacity of sunglass.
Question Three
Selling Price per unit = $20
Variable Cost per unit = $12
Contribution Margin = (S.P-V.C) = ($20 – $12) =	$8
$ 85,000.00	Fixed cost increase $25000 from $90000 to $115000
$ 40,000.00
$ 125,000.00
Therefore break even in units = $125,000/8 =	15625
break even in units = 15,625 sunglasses
CMR = $8/$20 =	0.400
$ 312,500.00
B)
Regular Sunglasses	Mirrored Sunglasses	see my solution key. Let me know if you do not understand
11,000	7,000
165,000.00	127,750.00
33000	Variable material cost @6.00	42000
11000
38500	24500
16500	10500
66,000.00	43,750.00
44000	Fixed Overhead Costs @4.25	29750
14000
$ 22,000.00
Conclusion: The changes in the fixed as well as variable costs for mirrored glasses did not affect the profitability of Ban Oak Corp. since for regular sunglass, the profit was $22,000 while for the mirrored sunglass was $0.00

Sheet1

Costs

PER UNIT

6.00

= FIXED COSTS / CONTRIBUTION MARGIN PER UNIT

= 0

CONTRIBUTION MARGIN PER UNIT 7.00
BREAK EVEN POINT IN UNITS

12,857

BREAK EVEN IN DOLLARS

and $16

15,000

Sales Revenue

4

Sales Revenue

Variable Materials 3.00

Variable Materials

Variable Labor 1.00 8,000 8000 UNITS * $1 12,000 20,000 Variable Labor 15,000
Variable Overhead 3.50

Variable Overhead

Variable Marketing Costs 1.50 12,000

Variable Marketing Costs

Total Variable Costs:

Total Variable Costs:

40,000

Contribution Margin

Fixed Costs:

90,000 90,000 Fixed Costs: 90,000

(LOSS)

40,000

15,000

Sales Revenue

Variable Materials 6.00

Variable Labor 1.00
Variable Overhead 3.50
Variable Marketing Costs 1.50

Total Variable Costs: 12.00
CONTRIBUTION MARGIN PER UNIT

Fixed Costs:

EQUATION

UNITS BREAKEVEN 14,375
SALES PRICES

BREAK EVEN IN DOLLARS

288,000

11,000 UNITS * $3

11,000 UNITS * $6

Variable Labor

18,000 UNITS * $1 18,000

Variable Overhead

.00

18,000 UNITS * $3.50 63,000

Variable Marketing

.00

18,000 UNITS * $1.50 27,000

CONTRIBUTION MARGIN

115,000.00 90,000

NET INCOME 18,000.00 36,000

																																																																																																																											MAC 7200, CASE STUDY WEEK 6
1) BREAK EVEN POINT
A) IN UNITS
			Sales Revenue	1		6.00
			Variable Materials		3.00
				Variable Labor			1.00
				Variable Overhead			3.50
				Variable Marketing			1.50
			Total Variable Costs:	9.00
			CONTRIBUTION MARGIN		7.00	44%
Fixed overhead	4.00
Fixed Marketing costs	2.00
Total Fixed Costs
	BREAK EVEN POINT IN UNITS		EQUATION
16N – 9N –				90,000
			Fixed Costs:	90,000.00	7N = 90000
	12,857	N=
B)		BREAK EVEN IN DOLLARS
	UNITS BREAKEVEN
	SALES PRICES	$ 16.00
$ 205,7	12.00
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
112,000		8000 UNITS * $1	192,000	304,000	2		40,000
24,000	8000 UNITS * $3		36,000	60,000	45,000
28,000	8000 UNITS * $3.50	42,000	70,000	52,500
8000 UNITS * $1.50		18,000	30,000	22,500
72,000	108,000	180,000	135,000
	Contribution Margin	84,000	124,000	105,000
irrelevant for special order
– 0
	NET INCOME	(6,000)	34,000	Net income
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
20.00
double old price
8.00	40%
	115,000.00	$90,000+$25000
20N – 12N – 115,000 = 0
BREAK EVEN UNITS		14,375	8N = 115000
B) BREAK EVEN IN DOLLARS
$ 20.00
$ 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
Variable Materials – REGULAR		11,000 UNITS * $3	33,000.00	54,000
Variable Materials – MIRRORED		11,000 UNITS * $6	42,000.00
	18,000 UNITS * $1		18,000.00
	18,000 UNITS * $3.50		63,000
	18,000 UNITS * $1.50		27,000
TOTAL VARIABLE COSTS	183,000.00	162,000
133,000.00	126,000
TOTAL FIXED COSTS
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.