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# Breakeven, special order, make or buy, margin of safety: FWC

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Break even analysis:
The variable income statement presented below is based on estimated sales of 2,660,000 units.
Variable costing
Sales 34,580,000
Variable COGS 18,088,000
Variable selling 2,660,000
Contribution margin 13,832,000
Fixed selling 1,420,000
Operating income 8,212,000
Income tax expense 3,284,800
Net income 4,927,200

Using the variable income statement provided above, compute the following:

a. Contribution margin per unit
b. Contribution margin percentage.
c. Breakeven in units AND in revenue.
d. Compute the margin of safety.
e. If the company spends an additional \$500,000 in marketing, the company can expect to see an additional 90,000 units in sales. Should the additional marketing expense be incurred? What is the impact on operating income?

Special order:
As a final part of the consulting services provided to FWC, you've been asked to help the company make some short term decisions.

The company has been asked to accept a special order from ABC Corporation Our client is seriously consider this offer since the production is down this year and is not expected to rise to normal levels until late next year.

Assume the following per unit costs are incurred:

Direct materials 4.10
Direct labor 1.50
VOH 1.20
Fixed OH Applied per unit 2.30
Standard cost per unit \$9.10

The current selling price of \$13.00 is unacceptable to the ABC Corporation. It has offered a price of \$7.25 per unit for an order of 150,000 units. Fixed costs would be unaffected by the special order. Variable selling cost of \$1.00 per unit would not be required.

1. Should FWC accept this special order? Provide detailed analysis including the impact on the operating income if the special order is accepted.
2. Assume that the variable selling cost of \$1.00 must be paid by FWC in order to accept the special order. In addition to the selling costs, the company will have to incur additional storage fees for the extra 150,000 units of \$15,000. If you answered yes to part 2, should our company still accept the special order? Compute the net impact on the operating income of FWC for the special order.
3. Assume the company determines in "2" above, that the increase in operating income is not sufficient to warrant accepting the special order. Production management tells us that if the special order is not accepted the company will have to lay off up to 30 workers. The cost to layoff these employees will result in a direct cost of \$100 per employee.
Additionally, the unemployment tax will increase by 2% on the total payroll which is estimated to be \$4,000,000. Of these employees, the production management estimates that only ½ will return. Cost to train new employees is estimated to be \$2,000 per person.

a. If the company doesn't accept the special order, what impact will the layoff have on the company?
b. Should the company accept the special order?
c. Are there any qualitative issues that should be considered in accepting the offer?

4. The company currently produces its own lining (part B12) for the packaging. The cost to manufacture the B12 part is \$0.10 per unit. The manufacturing costs assigned to the part is as follows:

DM \$0.03
DL .02
VOH .02
FOH .03

3,000,000 units of B12 are produced a year. Marble Liner Company has contact FWC and offered to provide B12 at a price of \$0.09 per unit. Accounting department review of the costs indicates that the fixed overhead costs will remain unchanged if the offer is accepted.

a. Should FWC accept the offer? Compute the impact of acceptance of the offer on operating income.
b. What is the maximum amount that the company should pay to an outside company for part B12?

5. Prepare a report to management explaining the findings for the situations described above. Include in the report a description of the steps that the company should the following to make these short term decisions. Explain the importance of developing relevant costs for these decisions including the concepts of sunk costs and opportunity cost.