Case Study -

Each question refers to the same initial data.  Treat each question separately.  Ignore income taxes.  Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel.  Use proper Contribution Income Statement formatting. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel.

Data for all questions:  Tam's Tables produces wooden kitchen and dining room tables. Their tables are sold at many local furniture stores.  The cost of manufacturing and marketing their tables, at their normal factory volume of 2,000 tables per month, is shown in the table below.  These tables sell for $700 each. Tam's Tables 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.)

Question 1:  What is the break-even point?  A) In units?  B) In sales dollars?

Question 2:  A large furniture chain has offered to purchase 2,000 tables(one time for their family dinner advertising campaign) if the sales price was lowered to $575 per table.  Tam's Tables' maximum capacity is 3,000 units. A) Based on the cost data provided, what would be the impact of the price decrease on sales, costs, and operating income if Tam's Tables accepted this sale?  Use a contribution margin income statement to show your results. B) Do you think Tam's Tables should accept this sale?  Support your decision with evidence and analysis.

Question 3:  Some of the furniture stores have been asking for granite-topped tables. Tam's Tables would be able to produce a granite-topped table with their wooden frame and legs on their existing assembly line if they purchased a new machine to shape the granite top.  This would increase fixed overhead costs by $150,000 per month (still based on normal production volume of 2,000 units).  The variable materials costs for the granite tables would also be double the cost of the variable materials for the granite tables (the granite is more expensive than the wood).  Maximum production for both types of tables together would still be 3,000 units because the same assembly line would be used.  Thegranite tables would sell for $1,000 each.  A)  What would be the break-even point if Tam's Tables only sold granite tables?  (In units and sales dollars) B) Create a contribution income statement for a month in which Tam's Tables sold 1,000 wooden tables, and 1,500 granite tables. C)  Explain, in your own words, how the changes to fixed and variable costs for the granite tables impact profitability.