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The Modern Mission Woodworking company has decided to offer a new line of custom dining room...

The Modern Mission Woodworking company has decided to offer a new line of custom dining room sets (tables with chairs). They require special wood working equipment that would cost $125,000. Further, this product line will be sold for only seven years with an anticipated 15% return on any capital investment (meaning large initial investments are amortized). This means the purchase of the new equipment will be amortized to establish the target sales/yr that will help the company make the 15% return. They plan to liquidate the equipment for this line of furniture after seven years and donate the equipment to a local high school. The target sale price for the dining sets is $4,000 each. The tables and chairs would have about $1,000 of material and require about 30 hours to make. The labor rate in this company is $40 per hour. Assume you have all the information needed to answer the three questions below.

A. What is the break-even point (dining sets per year to make and sell) that will enable them to meet their ROI goal of 15%? [3 pnts] B. What is the lowest they can sell a dining room set for and just meet his investment goal if they only sell 10 dining sets per year? [3 pnts] C. Assume 25 dining sets are sold each year (selling at $4,000/each), what is the profit per year? [4 pnts]

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Answer #1

A. Answer: 21 dining sets.

Annual amortization expense = $ 125,000 / 7 = $ 17,857.

ROI goal = $ 125,000 x 15 % = $ 18,750

Contribution margin per unit = $ 4,000 - $ 2,200 = $ 1,800

Number of units to be sold to earn $ 18,750 each year = $ ( 17,857 + 18,750 ) / $ 1,800 = 20.34 units or 21 units.

B.Answer: $ 5,860.70

Let the price of each dining set be P.

10 X ( P - 2,200 ) = ( 17,857 + 18,750 )

or P = $ 5,860.70

C. Answer: $ $ 27,143

Contribution Margin Income Statement
Sales ( 25 units @ $ 4,000) $100,000
Less:Variable Costs ( 25 units @ $ 2,200) 55,000
Contribution Margin 45,000
Fixed costs 17,857
Profit $ 27,143
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