Chapter 13, Problem 3VC

a)

Summary Introduction

Case summary:

Company WG manufactures 4 categories of instruments such as batch custom, mass produced, one-of-a-kind, and mass customized. It is necessary to set different prices to different categories of instruments to sustain in the business. Person BA, who is the vice president of Company WG, is responsible for setting the price.

The recommended retail cost is $349. Person BA calculates Company WG variable and fixed costs to know the breakeven point and profit. Profits and breakeven points are calculated under different conditions to assess the effects of production facility.

Characters in case:

Company WG

Person BA

Introduction:

Break-even point analysis is used to show the relationship between the total cost and total revenue to determine profits at several stages of output. The break-even point occurs when the total cost and total revenue are equal.

To determine: The breakeven point for $349.

Answer to Problem 3VC

The breakeven point for $349 is 1,288.1 units.

Explanation of Solution

Given information:

Company WG assumes $349, $389, and $309 are the breakeven points for the new line of guitars. Suppose, Company WG targets a sale of $2000 units at $349 retail price.

Expenses such as rent and taxes are $14,000, depreciation on equipment’s is $4000, and management control program is $20,000. The direct materials are 25 units and direct labour produces 15 units at 8hours. Assume the retail mark-up value is 50%.

Explanation:

The formula to compute the unite price for $349 is as follows:

$\text{Unit price}=\text{Retail price}\times \text{Retial markup value}$

Compute the unite price for $349 as given below:

$\begin{array}{c}\text{Unit price}=\text{Retail price}\times \text{Retial markup value}\\ =\$349\times 50\%\\ =\$349\times 0.5\\ =\$174.5\end{array}$

Hence, the unit price for retail price is $174.5.

The formula to compute the fixed cost for $349 is as follows:

$\text{Fixed cost}=\text{Rent and taxes}+\text{Depreciation}+\text{Management control}$

Compute the fixed cost for $349 as given below:

$\begin{array}{c}\text{Fixed cost}=\text{Rent and taxes}+\text{Depreciation}+\text{Management control}\\ =\$14,000+\$4,000+\$20,000\\ =\$38,000\end{array}$

Hence, the fixed cost for $349 is $38,000.

The formula to compute the variable cost for $349 is as follows:

$\text{Variable cost}=\text{Direct material}+\text{Direct labour}$

Compute the variable cost for $349 as given below:

$\begin{array}{c}\text{Variable cost}=\text{Direct material}+\text{Direct labour}\\ =\$25+\$15\times 8\text{hours}\\ =\$25+\$120\\ =\$145\end{array}$

Hence, the variable cost for $349 is $145.

The formula to compute break-even point for $349 is as follows:

$\text{BEP}=\frac{\text{Fixed cost}}{\text{Unit price}-\text{Variable cost}}$

Compute break-even point for $349 as given below:

$\begin{array}{c}\text{BEP}=\frac{\text{Fixed cost}}{\text{Unit price}-\text{Variable cost}}\\ =\frac{\$38,000}{\$174.5-\$145}\\ =\frac{\$38,000}{\$29.5}\\ =1,288.1\end{array}$

Hence, the breakeven point for $349 is 1,288.1 units.

b)

Summary Introduction

Case summary:

Company WG manufactures 4 categories of instruments such as batch custom, mass produced, one-of-a-kind, and mass customized. It is necessary to set different prices to different categories of instruments to sustain in the business. Person BA, who is the vice president of Company WG, is responsible for setting the price.

The recommended retail cost is $349. Person BA calculates Company WG variable and fixed costs to know the breakeven point and profit. Profits and breakeven points are calculated under different conditions to assess the effects of production facility.

Characters in case:

Company WG

Person BA

Introduction:

Break-even point analysis is used to show the relationship between the total cost and total revenue to determine profits at several stages of output. The break-even point occurs when the total cost and total revenue are equal.

To determine: The breakeven point for $389.

Answer to Problem 3VC

The breakeven point for $389 is 767.67units.

Explanation of Solution

Given information:

Company WG assumes $349, $389, and $309 are the breakeven points for the new line of guitars. Suppose, Company WG targets a sale of $2000 units at $349 retail price.

Expenses such as rent and taxes are $14,000, depreciation on equipment’s is $4000, and management control program is $20,000. The direct materials are 25 units and direct labour produces 15 units at 8hours. Assume the retail mark-up value is 50%.

Explanation:

The formula to compute the unite price for $349 is as follows:

The formula to compute the unite price for $389 is as follows:

$\text{Unit price}=\text{Retail price}\times \text{Retial markup value}$

Compute the unite price for $389 as given below:

$\begin{array}{c}\text{Unit price}=\text{Retail price}\times \text{Retial markup value}\\ =\$389\times 50\%\\ =\$389\times 0.5\\ =\$194.5\end{array}$

Hence, the unit price for retail price is $194.5.

The formula to compute the fixed cost for $389 is as follows:

$\text{Fixed cost}=\text{Rent and taxes}+\text{Depreciation}+\text{Management control}$

Compute the fixed cost for $389 as given below:

$\begin{array}{c}\text{Fixed cost}=\text{Rent and taxes}+\text{Depreciation}+\text{Management control}\\ =\$14,000+\$4,000+\$20,000\\ =\$38,000\end{array}$

Hence, the fixed cost for $389 is $38,000.

The formula to compute the variable cost for $389 is as follows:

$\text{Variable cost}=\text{Direct material}+\text{Direct labour}$

Compute the variable cost for $389 as given below:

$\begin{array}{c}\text{Variable cost}=\text{Direct material}+\text{Direct labour}\\ =\$25+\$15\times 8\text{hours}\\ =\$25+\$120\\ =\$145\end{array}$

Hence, the variable cost for $389 is $145.

The formula to compute break-even point for $389 is as follows:

$\text{BEP}=\frac{\text{Fixed cost}}{\text{Unit price}-\text{Variable cost}}$

Compute break-even point for $389 as given below:

$\begin{array}{c}\text{BEP}=\frac{\text{Fixed cost}}{\text{Unit price}-\text{Variable cost}}\\ =\frac{\$38,000}{\$194.5-\$145}\\ =\frac{\$38,000}{\$49.5}\\ =767.67\end{array}$

Hence, the breakeven point for $389 is 767.67units.

c)

Summary Introduction

Case summary:

Company WG manufactures 4 categories of instruments such as batch custom, mass produced, one-of-a-kind, and mass customized. It is necessary to set different prices to different categories of instruments to sustain in the business. Person BA, who is the vice president of Company WG, is responsible for setting the price.

The recommended retail cost is $349. Person BA calculates Company WG variable and fixed costs to know the breakeven point and profit. Profits and breakeven points are calculated under different conditions to assess the effects of production facility.

Characters in case:

Company WG

Person BA

Introduction:

Break-even point analysis is used to show the relationship between the total cost and total revenue to determine profits at several stages of output. The break-even point occurs when the total cost and total revenue are equal.

To determine: The breakeven point for $309.

Answer to Problem 3VC

The breakeven point for $309 is 4,000units.

Explanation of Solution

Given information:

Company WG assumes $349, $389, and $309 are the breakeven points for the new line of guitars. Suppose, Company WG targets a sale of $2000 units at $349 retail price.

Expenses such as rent and taxes are $14,000, depreciation on equipment’s is $4000, and management control program is $20,000. The direct materials are 25 units and direct labour produces 15 units at 8hours. Assume the retail mark-up value is 50%.

Explanation:

The formula to compute the unite price for $309 is as follows:

$\text{Unit price}=\text{Retail price}\times \text{Retial markup value}$

Compute the unite price for $309 as given below:

$\begin{array}{c}\text{Unit price}=\text{Retail price}\times \text{Retial markup value}\\ =\$309\times 50\%\\ =\$309\times 0.5\\ =\$154.5\end{array}$

Hence, the unit price for retail price is $154.5.

The formula to compute the fixed cost for $309 is as follows:

$\text{Fixed cost}=\text{Rent and taxes}+\text{Depreciation}+\text{Management control}$

Compute the fixed cost for $309 as shown below:

$\begin{array}{c}\text{Fixed cost}=\text{Rent and taxes}+\text{Depreciation}+\text{Management control}\\ =\$14,000+\$4,000+\$20,000\\ =\$38,000\end{array}$

Hence, the fixed cost for $389 is $38,000.

The formula to compute the variable cost for $309 is as follows:

$\text{Variable cost}=\text{Direct material}+\text{Direct labour}$

Compute the variable cost for $309 as given below:

$\begin{array}{c}\text{Variable cost}=\text{Direct material}+\text{Direct labour}\\ =\$25+\$15\times 8\text{hours}\\ =\$25+\$120\\ =\$145\end{array}$

Hence, the variable cost for $309 is $145.

The formula to compute break-even point for $309 is as follows:

$\text{BEP}=\frac{\text{Fixed cost}}{\text{Unit price}-\text{Variable cost}}$

Compute break-even point for $309 as given below:

$\begin{array}{c}\text{BEP}=\frac{\text{Fixed cost}}{\text{Unit price}-\text{Variable cost}}\\ =\frac{\$38,000}{\$154.5-\$145}\\ =\frac{\$38,000}{\$9.5}\\ =4,000\end{array}$

Hence, the breakeven point for $309 is 4,000units.

d)

Summary Introduction

Case summary:

Company WG manufactures 4 categories of instruments such as batch custom, mass produced, one-of-a-kind, and mass customized. It is necessary to set different prices to different categories of instruments to sustain in the business. Person BA, who is the vice president of Company WG, is responsible for setting the price.

The recommended retail cost is $349. Person BA calculates Company WG variable and fixed costs to know the breakeven point and profit. Profits and breakeven points are calculated under different conditions to assess the effects of production facility.

Characters in case:

Company WG

Person BA

Introduction:

Profit is a gain from the business to an organisation. The gain for the organisation comes from the business activities that exceed the costs, taxes, and expenses.

To determine: The profit for the given quantity for $349.

Answer to Problem 3VC

Company WG will never reach a breakeven at $309 for its targeted sales of 2,000 units.

The profit of Company WG is $21,000.

Explanation of Solution

Given information:

Company WG assumes $349, $389, and $309 are the breakeven points for the new line of guitars. Suppose, Company WG targets a sale of $2000 units at $349 retail price.

Expenses such as rent and taxes are $14,000, depreciation on equipment’s is $4000, and management control program is $20,000. The direct materials are 25 units and direct labour produces 15 units at 8hours. Assume the retail mark-up value is 50%.

Explanation:

The calculation of profit for 2,000 units at retail cost of $349 is given below:

The formula to compute the unite price for $349 is as follows:

$\text{Unit price}=\text{Retail price}\times \text{Retial markup value}$

Compute the unite price for $349 as given below:

$\begin{array}{c}\text{Unit price}=\text{Retail price}\times \text{Retial markup value}\\ =\$349\times 50\%\\ =\$349\times 0.5\\ =\$174.5\end{array}$

Hence, the unit price for retail price is $174.5.

The formula to compute the fixed cost for $349 is as follows:

$\text{Fixed cost}=\text{Rent and taxes}+\text{Depreciation}+\text{Management control}$

Compute the fixed cost for $349 as given below:

$\begin{array}{c}\text{Fixed cost}=\text{Rent and taxes}+\text{Depreciation}+\text{Management control}\\ =\$14,000+\$4,000+\$20,000\\ =\$38,000\end{array}$

Hence, the fixed cost for $349 is $38,000.

The formula to compute the variable cost for $349 is as follows:

$\text{Variable cost}=\text{Direct material}+\text{Direct labour}$

Compute the variable cost for $349 as given below:

$\begin{array}{c}\text{Variable cost}=\text{Direct material}+\text{Direct labour}\\ =\$25+\$15\times 8\text{hours}\\ =\$25+\$120\\ =\$145\end{array}$

Hence, the variable cost for $349 is $145.

The formula to compute break-even point for $349 is as follows:

$\text{BEP}=\frac{\text{Fixed cost}}{\text{Unit price}-\text{Variable cost}}$

Compute break-even point for $349 as given below:

$\begin{array}{c}\text{BEP}=\frac{\text{Fixed cost}}{\text{Unit price}-\text{Variable cost}}\\ =\frac{\$38,000}{\$174.5-\$145}\\ =\frac{\$38,000}{\$29.5}\\ =1,288.1\end{array}$

Hence, the breakeven point for $349 is 1,288.1 units.

The formula to compute profit for quantity 2,000 units at price of $349 is as follows:

$\text{Profit}=(\text{Price}\times \text{Quantity)}-\left(\text{Fixed cost}+\left(\text{Variable cost}\times \text{Quantity}\right)\right)$

Compute break-even point for $349 as given below:

$\begin{array}{c}\text{Profit}=(\text{Price}\times \text{Quantity)}-\left(\text{Fixed cost}+\left(\text{Variable cost}\times \text{Quantity}\right)\right)\\ =(\$174.5\times 2,000\text{)}-\left(\$38,000+\left(\$145\times 2,000\right)\right)\\ =\$349,000-(\$38,000+290,000)\\ =\$349,000-328,000\end{array}$

$=\$21,000$

Hence, the profit of Company WG is $21,000.