85 per footfreestanding hammockmaterialquantity required per unitpricewood12 board feet B u s i n e s s F i n a n c e

85 per footfreestanding hammockmaterialquantity required per unitpricewood12 board feet B u s i n e s s F i n a n c e

Complete the Week 1 Case Study focusing on cost-volume-profit analysis.

Background Information:

Turner Woodworking, LLC is a small family owned manufacturing business. They have three primary products:

  • Birdhouse
  • Porch swing
  • Freestanding hammock

All products are made within their existing on-site manufacturing facility.

Current selling prices are as follows:

Products

Selling price per unit

Birdhouse

$58

Porch swing

$525

Freestanding hammock

$375

Material requirements for each product are as follows:

Birdhouse

Material

Quantity required per unit

Price

Wood

4 board feet

$3 per board foot

Finishing products

0.5 quarts

$6.20 per quart

Porch swing

Material

Quantity required per unit

Price

Wood

40 board feet

$3 per board foot

Hardware

1 set

$25 per set

Finishing products

3 quarts

$6.20 per quart

Chains

28 feet

$1.85 per foot

Freestanding Hammock

Material

Quantity required per unit

Price

Wood

12 board feet

$3 per board foot

Hardware

1 set

$25 per set

Finishing products

1 quart

$6.20 per quart

Rope

180 feet

$0.75 per foot

Labor hours for each product are as follows:

Products

Labor Hours

Birdhouse

1.5 hours

Porch swing

3.5 hours

Freestanding hammock

6 hours

The direct labor rate is $14 per hour. The company employs 8 workers in the manufacturing area. Each employee works an average of 160 hours per month for total monthly estimated direct labor hours of 1,280.

The manufacturing facility incurs the following monthly fixed costs:

Lease

$9,500

Utilities

$1,800

Equipment depreciation

$2,200

Supervisor salary

$3,000

Indirect materials

$780

Management allocates fixed manufacturing overhead costs by considering the dedicated square footage in the factory, equipment used in production, and direct labor hours required to make the product. Based on their analysis, they have arrived at the following allocation per product line:

Products

Fixed Cost Allocation Percentage

Birdhouse

15%

Porch swing

50%

Freestanding hammock

35%

Requirements:

  1. Compute the variable cost for each product.
  2. Compute the contribution margin for each product.
  3. Compute the contribution margin ratio for each product.
  4. Compute the break-even point for each product assuming the existing allocation rate for fixed manufacturing overhead.
  5. Compute the target profit break-even point assuming that management wishes to earn the following profit levels:

Products

Target Profit

Birdhouse

$6,000

Porch swing

$12,000

Freestanding hammock

$8,000

  1. During the month of August, the company manufactures and sells the following:

Products

Qty

Birdhouse

230

Porch swing

90

Freestanding hammock

88

Prepare a contribution margin income statement assuming that fixed selling and administrative expenses are $5,300.

  1. While management has extensive knowledge of woodworking and manufacturing, they have no background in accounting or finance. Prepare a memo to management (two-page minimum) to explain your findings from the CVP analysis performed above.

Be sure to include the following elements:

  • Key findings related to contribution margin ratios, break-even points, and target profit.
  • Using CVP analysis to better understand cost behavior and maximize profitability.
  • Conclusions related to current staffing and future staffing considerations.
  • Using CVP analysis to make better sales-mix decisions.
  • Applying CVP concepts in scenarios of constrained resources such as labor or equipment.
  • Implementing CVP to improve pricing decisions.
  • Incorporating CVP into capital investment decisions.

The Week 1 Case Study paper