Blowing Safety Co. P/L manufactures safety parachutes for the airline industry. These are sold directly to the airline companies. Management expects to manufacture and sell around 90,000 parachutes for 2010; the selling price for each parachute to be $425.00 each. The direct material cost per parachute is $145.00.
The company estimates, based on historical data that there will be around 1150 orders for the year from their 95 customers and will involve producing 240 batches of parachutes.
The company introduced Activity-based costing in 2008 and the following activities and costs have been identified.
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ACTIVITY
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LEVEL OF ACTIVITY
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ESTIMATED COSTS
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Production-related costs
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Production design
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Product
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$35,000
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Production design
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Batch
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$110.00 per batch
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Moving materials to cutting area
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Batch
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$85.00 per batch
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Cutting machines set-up
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Batch
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$140.00 per batch
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Moving materials to sewing area
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Batch
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$90.00 per batch
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Sewing machines set-up
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Batch
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$110.00 per batch
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Cutting pattern
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Unit
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$25.00 per unit
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Stitching
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Unit
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$60.00 per unit
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Waterproofing
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Unit
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$45.00 per unit
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Inspection
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Unit
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$18.00 per unit
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Packaging
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Unit
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$9.00 per unit
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Sales-related costs
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Processing customer order
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Order
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$55.00 per order
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Distribution
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Order
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$275.00 per order
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Sales calls
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Customer
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$460.00 per order
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Handling customer complaints
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Customer
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$115.00 per order
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Advertising
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Market
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$40,000
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Other Operational costs
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Administration
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Company
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$295,000
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Assignment requirements.
- Develop a spreadsheet and calculate the estimated profit for 2010.
- Calculate the number of parachutes the company would need to sell in order to break even.
- How many parachutes would the company need to sell in order to achieve a pre-tax profit of $1,000,000 (to the nearest full parachute)
- What is the company's Margin of Safety based on estimated sales of 90,000? What does this mean to management?
- The Marketing Manager feels that by lowering the selling price to $400 and by dropping Advertising costs to $35,000, they will be able to sell around 100,000. Advise the marketing manager what the financial outcomes would be if this was to be implemented. Do you feel that it is appropriate, explaining your reasons.