Ethan Behnken IV, president of Ethan’s Craftsmanship, takes pride in carrying on a tradition of manufacturing custom quality furniture, a skill that was started by his great-grandfather in southern Germany almost 100 years ago. Throughout its existence, the company has focused on the high end of the furniture line and remained relatively small. They were not interested in getting into the mass production of lesser quality items. Their workmanship and quality of product have attracted a loyal following of customers and clients who are willing to pay a premium for Behnken furnishings. Just two years ago, Ethan Behnken IV purchased the controlling interest in Garden Patios Deluxe. This is a small company that specialized in making high-end patio and outdoor garden-type furniture. The furniture is sturdy, rust-resistant, and uses quality materials that resist weathering and fading for a number of years. So far, the operation of Garden Patios Deluxe has been a success. The company is bringing in a profit, but it has been a little harder to attract a market than Ethan first imagined. The northern climate can tend to limit the outdoor season, and it seemed that people did not want to pay a lot of money for patio furniture that would have to be in storage for half the year. As a matter of course, Ethan likes to review the manufacturing process for the different furniture lines about every eighteen months. He was interested in getting a detailed breakdown of the production cost and methods used to make the patio tables and chairs. The material is a specially developed compound of structurally sound polymers, which is molded and heat treated by a supplier. The compound comes in four basic colors of beige, forest green, gray and white. The furniture pieces are constructed at the Garden Patios plant, and parts like the fabric seats, glass inlays, and other decorative features are assembled. The plant used in this manufacturing capacity is operating at about 90% of capacity, although there are some seasonal fluctuations. The busy season is from November through May, prior to the outdoor entertainment season. In the summer, much time is spent redesigning and testing new models or experimenting on variations in existing product lines. One of the most popular pieces made by Garden Patios Deluxe is a simple armchair. The chair has a molded frame that comes in about 4 pieces, along with a contoured fabric seat. The chairs can be retailed in a set with a table or sold separately. They are extremely comfortable and lightweight. Ethan wanted to know the actual cost of manufacturing a single chair. The following unit cost is identified. The total costs are based on a normal annual volume of 40,000 chairs. The current selling price of the chairs is $80 each. Item Costs/Unit Costs/Unit Total Costs Materials Main Frame 9.00 $360,000 Chair Arm 2 @ $1.75 = 3.50 140,000 Stand 4.50 180,000 Fabric Seat and Back 5.00 200,000 Related Supplies 2.00 80,000 Total Materials $24.00 960,000 Labor Fabric Labor 30 min @ $10 = 5.00 200,000 Assembly Labor 20 min @ $12 = 4.00 160,000 Total Labor 9.00 360,000 Fixed Overhead Manufacturing 150% of Labor = 13.50 540,000 Administrative 25% of Material = 6.00 240,000 Total Fixed Overhead 19.50 780,000 Total Manufacturing Cost $52.50 $2,100,000 Required: If Ethan’s Craftsmanship sells all 40,000 chairs, how much will the company make on the chairs? What is the marginal cost of making one additional chair? If the company is able to produce and sell 44,000 chairs, how much will the company make on the chairs?
Ethan Behnken IV, president of Ethan’s Craftsmanship, takes pride in carrying on a tradition of manufacturing custom quality furniture, a skill that was started by his great-grandfather in southern Germany almost 100 years ago.
Throughout its existence, the company has focused on the high end of the furniture line and remained relatively small. They were not interested in getting into the mass production of lesser quality items. Their workmanship and quality of product have attracted a loyal following of customers and clients who are willing to pay a premium for Behnken furnishings.
Just two years ago, Ethan Behnken IV purchased the controlling interest in Garden Patios Deluxe. This is a small company that specialized in making high-end patio and outdoor garden-type furniture. The furniture is sturdy, rust-resistant, and uses quality materials that resist weathering and fading for a number of years.
So far, the operation of Garden Patios Deluxe has been a success. The company is bringing in a profit, but it has been a little harder to attract a market than Ethan first imagined. The northern climate can tend to limit the outdoor season, and it seemed that people did not want to pay a lot of money for patio furniture that would have to be in storage for half the year.
As a matter of course, Ethan likes to review the manufacturing process for the different furniture lines about every eighteen months. He was interested in getting a detailed breakdown of the production cost and methods used to make the patio tables and chairs.
The material is a specially developed compound of structurally sound polymers, which is molded and heat treated by a supplier. The compound comes in four basic colors of beige, forest green, gray and white. The furniture pieces are constructed at the Garden Patios plant, and parts like the fabric seats, glass inlays, and other decorative features are assembled.
The plant used in this manufacturing capacity is operating at about 90% of capacity, although there are some seasonal fluctuations. The busy season is from November through May, prior to the outdoor entertainment season. In the summer, much time is spent redesigning and testing new models or experimenting on variations in existing product lines.
One of the most popular pieces made by Garden Patios Deluxe is a simple armchair. The chair has a molded frame that comes in about 4 pieces, along with a contoured fabric seat. The chairs can be retailed in a set with a table or sold separately. They are extremely comfortable and lightweight.
Ethan wanted to know the actual cost of manufacturing a single chair. The following unit cost is identified. The total costs are based on a normal annual volume of 40,000 chairs. The current selling price of the chairs is $80 each.
|
Item |
Costs/Unit |
Costs/Unit |
Total Costs |
|
Materials |
|
|
|
|
Main Frame |
9.00 |
|
$360,000 |
|
Chair Arm |
2 @ $1.75 = 3.50 |
|
140,000 |
|
Stand |
4.50 |
|
180,000 |
|
Fabric Seat and Back |
5.00 |
|
200,000 |
|
Related Supplies |
2.00 |
|
80,000 |
|
Total Materials |
|
$24.00 |
960,000 |
|
Labor |
|
|
|
|
Fabric Labor |
30 min @ $10 = 5.00 |
|
200,000 |
|
Assembly Labor |
20 min @ $12 = 4.00 |
|
160,000 |
|
Total Labor |
|
9.00 |
360,000 |
|
Fixed |
|
|
|
|
Manufacturing |
150% of Labor = 13.50 |
|
540,000 |
|
Administrative |
25% of Material = 6.00 |
|
240,000 |
|
Total Fixed Overhead |
|
19.50 |
780,000 |
|
Total |
|
$52.50 |
$2,100,000 |
Required:
- If Ethan’s Craftsmanship sells all 40,000 chairs, how much will the company make on the chairs?
- What is the marginal cost of making one additional chair?
- If the company is able to produce and sell 44,000 chairs, how much will the company make on the chairs?
- During the off-season, a special order for 3,000 chairs has come in from an overseas government agency. However, this company is only willing to pay $50.00 per chair because of the currency exchange rate, but Behnken will have to pay a shipping and tariff cost of $5 per chair. Should Ethan’s Craftsmanship accept this order? How much money will the company make or lose on this order?
- The supplier who provides the special polymer material for the chairs has introduced a proposal to ship the chairs to Behnken fully assembled for $50.00 per chair, which is less than the current manufacturing cost to Behnken of $52.50. All Behnken would have to do is send the chairs out to their customers. Should Behnken accept the offer? How much money will the company make or lose on this offer?
- The marketing manager believes that the customer base for chairs is pretty strong and that a price increase to $85 per chair would only reduce demand by 2,000 chairs. Should Behnken implement a price increase? If the actual price per chair were increased to $85, how far could the annual demand for chairs decline before Behnken would be indifferent between the $80 price and the $85 price?
- What nonfinancial issues should be considered before decisions are made regarding the production and sale of these chairs?
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