Question

2022 Income Statement

(Product Name:)	Cone	Creak	Cat	Cell	Na	Na	Na	Na	2022 Total	Common Size
Sales	$63,964	$47,482	$54,393	$58,726	$0	$0	$0	$0	$224,564	100.0%
Variable Costs:
Direct Labor	$14,878	$9,722	$11,356	$11,811	$0	$0	$0	$0	$47,767	21.3%
Direct Material	$24,482	$20,330	$20,708	$23,236	$0	$0	$0	$0	$88,755	39.5%
Inventory Carry	$0	$292	$1,207	$904	$0	$0	$0	$0	$2,402	1.1%
Total Variable	$39,360	$30,343	$33,271	$35,951	$0	$0	$0	$0	$138,924	61.9%
Contribution Margin	$24,605	$17,139	$21,122	$22,775	$0	$0	$0	$0	$85,640	38.1%
Period Costs:
Depreciation	$3,024	$1,927	$2,947	$3,173	$0	$0	$0	$0	$11,071	4.9%
SG&A: R&D	$858	$655	$510	$571	$0	$0	$0	$0	$2,595	1.2%
Promotions	$1,350	$1,350	$1,350	$1,350	$0	$0	$0	$0	$5,400	2.4%
Sales	$1,000	$1,000	$900	$900	$0	$0	$0	$0	$3,800	1.7%
Admin	$482	$358	$410	$443	$0	$0	$0	$0	$1,693	0.8%
Total Period	$6,715	$5,290	$6,117	$6,437	$0	$0	$0	$0	$24,558	10.9%
Net Margin	$17,890	$11,849	$15,005	$16,338	$0	$0	$0	$0	$61,082	27.2%

Definitions: Sales: Unit sales times list price. Direct Labor: Labor costs incurred to produce the product that was sold. Inventory Carry Cost: the cost to carry unsold goods in inventory. Depreciation: Calculated on straight-line 15-year depreciation of plant value. R&D Costs: R&D department expenditures for each product. Admin: Administration overhead is estimated at 1.5% of sales. Promotions: The promotion budget for each product. Sales: The sales force budget for each product. Other: Charges not included in other categories such as Fees, Write Offs, and TQM. The fees include money paid to investment bankers and brokerage firms to issue new stocks or bonds plus consulting fees your instructor might assess. Write-offs include the loss you might experience when you sell capacity or liquidate inventory as the result of eliminating a production line. If the amount appears as a negative amount, then you actually made money on the liquidation of capacity or inventory. EBIT: Earnings Before Interest and Taxes. Short Term Interest: Interest expense based on last year's current debt, including short term debt, long term notes that have become due, and emergency loans. Long Term Interest: Interest paid on outstanding bonds. Taxes: Income tax based upon a 35% tax rate. Profit Sharing: Profits shared with employees under the labor contract. Net Profit: EBIT minus interest, taxes, and profit sharing.

Other	$6,851	3.1%
EBIT	$54,231	24.1%
Short Term Interest	$2,586	1.2%
LongTerm Interest	$4,941	2.2%
Taxes	$16,346	7.3%
Profit Sharing	$607	0.3%
Net Profit	$29,750	13.2%

Chester has negotiated a new labor contract for the next round that will affect the cost for their product Cone. Labor costs will go from $7.91 to $8.51 per unit. Assume all period and other variable costs remain the same. If Chester were to absorb the new labor costs without passing them on in the form of higher prices, how many units of product Cone would need to be sold next round to break even on the product?

Select: 1

	1,980
	553
	567
	540

Answer 1

1. Number of Units sold Now = Direct labor / Direct Labor Cost per Unit

Number of Units sold Now = $14878 / 7.91 = 1881 Units

Selling Price = SAles / Units Sold = $63964 / 1881 = $34

2. Total Fixed Costs = $6715

3. New Contribution margin = (Current Margin - Increase in labor Cost) / Sales

New Contribution margin = ($24605 - (8.51 - 7.91)*1881) / 63964

New Contribution margin = ($23476.40) / 63964

New Contribution margin = 36.7025%
4. Sales required to breakeven = Fixed Costs / Contribution margin

Sales required to breakeven = 6715 / 36.7025%

Sales required to breakeven = $18295.75

Units sales required to break even = Sales Required / Price

Units sales required to break even = $18295.75 / 34.005

Units sales required to break even = 540 Units (rounded off from 538 units)

Option D 540 Units

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