MBA 6100 Case Study #1
Each question refers to the same initial data. Treat each Part individually. Ignore income taxes. Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting – example below. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. (This case study is worth 50 points total.)
Contribution Margin Format Example:
Data for all questions: Panalon produces cast iron dutch ovens (a deep pot with a lid that can be used on a stovetop or in the oven). Their pots are sold at many local department stores. The cost of manufacturing and marketing their pots, at their normal factory volume of 15,000 pots per month, is shown in the table below. These pots sell for $60 each. Panalon is making a small profit, but would prefer to increase profitability.
Hint: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.
Data for all Questions:
Part 1: (12 points)
A) Prepare a Contribution Margin Income Statement for the company using the given financial data at their normal factory volume. Include line items for each type of cost as well as subtotals for the variable and fixed costs.
B) What is the break-even point in units? (Show your calculations.)
C) What is the break-even point in sales dollars? (Show your calculations.)
D) Using a Contribution Margin Income Statement, verify that your calculated break-even volume results in Operating Income of Zero. (Prepare the entire Contribution Margin statement at the break-even level.)
Part 2: (10 points)
A kitchen-goods chain has offered to purchase 13,000 pots (one time in one month) if the sales price was lowered to $50 per pot. Panalon’s maximum capacity is 25,000 units.
A) Based on the cost data provided, what would be the impact of the price decrease on sales, costs, and operating income if Panalon accepted this sale? Prepare a contribution margin income statement to show your results.
B) Do you think Panalon should accept this sale? Support your decision with evidence and analysis.
Hint: Compare your contribution margin income statement including the special sale to the company’s normal contribution margin income statement.
Part 3: (12 points)
Panalon is thinking of increasing sales by offering pots with a colored enamel coating. The investment needed to enamel their pots would increase fixed overhead costs by $80,000 per month. The variable materials cost (only variable material costs – not all variable costs) would increase by $8 per pot. Maximum production for the pots would remain 25,000 units because the same production lines would be used. Market research estimates that the colored pots would sell for $75 each, and volume would increase 25%.
A) Prepare a revised Contribution Margin Income Statement to include the costs and benefits of the colored pots.
B) What is the new break-even point in units for the colored pots?
C) What is the new break-even point in sales dollars for the colored pots?
D) If volume did not increase when making the colored pots, is Panalon better off producing colored pots or their basic black cast iron pots? Support your answer with data.
Part 4: (16 points)
Panalon is thinking of cutting costs by using a different raw material supplier. Their variable material costs would decrease by 25%. The quality of the metal is lower, so Panalon estimates that their additional fixed scrap costs related to the metal quality would be $20,000 per month. They would not change the pricing of their pots.
Note: Use the initial data provided for all questions. Ignore the colored pots and special sale data from other questions.
A) Prepare a revised Contribution Margin Income Statement to include the costs and benefits of the different raw material supplier.
B) If the sales decrease because of the change in quality, how much of a reduction in sales (dollars and units) could Panalon handle and still keep their net operating income the same as before the supplier change? Show your data in a Contribution Margin Income Statement.
C) Write a memo to the CFO that presents the pros and cons of the potential supplier change. Include the potential impacts on revenue costs and net operating income, as well as any other factors or consequences of this decision. Be sure to include quantitative evidence and backup as well as any qualitative analysis.
Hint: The analysis is expected to be thorough. Expect to present approximately 400 words, and support your analysis with data (either given or calculated). Remember that this is a letter to the CFO, so proper grammar is expected.