Robin Simmons is ready to complete a cost-volume-profit analysis for 2016 for the Stellar Packaging Products manufacturing plant to determine if the break-even point is achieved, given the expected decline in volume. Specific costs for production of 500,000 units include the following:
|
Stellar Packaging Products |
Variable Costs Total |
Fixed Costs Total |
|
Raw materials |
$ 400,000 |
|
|
Direct manufacturing labor |
$ 200,000 |
|
|
Indirect manufacturing labor |
|
$ 105,000 |
|
Factory Insurance & Utilities |
|
$ 63,000 |
|
Depreciation — Machinery and factory |
|
$ 38,500 |
|
Repairs and maintenance — factory |
|
$ 28,000 |
|
Selling, marketing and distribution expenses |
$ 40,000 |
$ 80,000 |
|
General and administrative expenses |
|
$ 120,000 |
There are no beginning or ending inventories. The total sales for 500,000 units produced are $2,000,000.
Instructions:
Answer the following questions given the fact pattern above, showing all calculations.
- What is the contribution margin per unit for each chocolate bar produced, given the fact pattern above?
- What is the Stellar Packaging’s U.S. division break-even point in units and dollars, given the fact pattern above?
- What is the Stellar Packaging’s U.S. division margin of safety and degree of operating leverage, given the fact pattern above?
- Write a brief explanation (approximately two paragraphs) that Simmons might deliver to management to inform them of the analytical outcome, given the projected revenue and cost. Does the company have to implement a cost-reduction strategy in order to break even?
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