Questions -
1. (CVP Analysis) Cross volume profit analysis
During the third year of operations, Memories, Inc. estimates that 415,000 figurines (385,000 dolls and 30,000 replicas) will be produced. Direct material costs per unit remain at $.74 per doll and $.62 per replica. Direct labor costs are $2.51 per doll and $2.78 per replica. Monthly fixed selling and administrative costs are $15,300 while monthly fixed manufacturing overhead is $2,851. The variable overhead cost is $.55 per figurine. Sales price for the replicas is $5.25 each and the sales price for the dolls is $5.00 each.
Required: (For each independent question, refer to the original information above.)
A. Compute the break-even point in Year 3 for the figurines. How many dolls and how many replicas must be sold to break-even?
B. What options does MI have to reduce the break-even point? Discuss both the quantitative and qualitative factors that must be considered with each option.
C. How many dolls and replicas, respectively, would MI need to sell in Year 3 to earn a before-tax profit of $150,000?
D. If its tax rate is 30 percent, how many figurines does MI need to sell in Year 3 to earn an after-tax profit of $150,000?
E. How will the break-even point change if the sales mix changes to 80 percent dolls and 20 percent replicas?
F. What would happen to the break-even point if labor costs increased by 10 percent for each type of figurine?
G. What would happen to the break-even point if MI increased the sales price of replicas to $5.50 and dolls to $5.25?
2. (Special Order)
In March of Year 3, Memories, Inc. receives a special order from a local museum to purchase 5,000 dolls and 3,000 replicas for a special exhibit.
Required:
A. Assuming that MI has sufficient excess capacity, what is the minimum price the company would be willing to accept for this special order? Assuming that the company does not have sufficient excess capacity, what minimum price would be acceptable? What qualitative factors should MI consider when deciding whether to accept the special order?
B. MI is nearing its manufacturing capacity and needs to consider ways to increase throughput. What options does the company have to increase capacity? What bottlenecks does it face? What recommendations would you make?