Question

Data for all questions: Dave’s Desks produces wooden desks. Their desks are designed for elementary and middle schools, and therefore, schools are their largest customers. The cost of manufacturing and marketing their desks, at their normal factory volume of 300 desks per month, is shown in the table below. These desks sell for $99 each. Dave’s Desks 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.

Unit manufacturing costs:
Variable materials $15
Variable labor $30
Variable overhead $20
Fixed overhead $15
Total unit manufacturing cost $80

Unit marketing costs:
Variable marketing costs $10
Fixed marketing costs $5
Total unit marketing costs $15

Total Unit Costs $95

Question: Research has shown that there is a need for science lab desks in the market. Dave’s Desks would be able to produce science lab desks on their existing assembly line if they purchased a new machine to produce the more durable desk top. This would increase fixed overhead costs by $3,000 per month (still based on normal production volume of 300 units). In addition, the variable materials costs (not all variable costs – just variable material costs) for the science lab desks would be double the cost of the variable materials for the regular desks. Maximum production for both types of desks together would still be 600 units because the same assembly line would be used. The science lab desks would sell for $139 each.

A) What would be the break-even point if Dave’s Desks only sold science lab desks?

B) Create a contribution income statement for a month in which Dave’s Desks sold 250 regular desks, and 150 science lab desks.

Answer 1

Working		New Scenario
		Regular Desk	Science Lab Desk
	Selling Price	99	139
	Variable Material	15	30
	Variable Labor	30	30
	Variable Overhead	20	20
	Fixed Overhead (300*15)+3000			7500
	Variable Marketing Cost	10	10
	Fixed Marketing Cost (300*5)			1500
A	Contribution Margin (139-30-30-20-10)		49
	Fixed Cost (7500+1500)		9000
	Break Even Point (FC/CM)	9000/49	184 Science Lab Desk
B	Income Statement
		Regular Desk	Science Lab Desk	Total
	Unit Sold	250	150	400
	Sale Revenue	24750	20850	45600
	Less: Variable Cost
	-Direct Material	3750	4500	8250
	-Direct Labor	7500	4500	12000
	-Variable Overhead	5000	3000	8000
	-Variable Marketing	2500	1500	4000
	Contribution Margin	6000	7350	13350
	Fixed Cost			9000
	Net Operating Income			4350