Need help with Part C Panalon produces cast iron dutch ovens (a deep pot with a
ID: 2822056 • Letter: N
Question
Need help with Part C
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 5,000 pots per month, is shown in the table below. These pots sell for $50 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. Questions: 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 scrap costs related to the metal quality would be $5,000 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 could Panalon handle and still keep their net operating income the same as before the supplier change?
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).
Panlon Company Contribution Margin Income statement For the year ending 2018 December 31 Volume 5000 Sales $250,000.00 Variable Expenses Less: Variable Manufactoring Materials $37,500.00 Less: Variable Manufactoring Labor $45,000.00 Less: Variable Manufactoring Overhead $25,000.00 Less: Variable Marketing Cost $20,000.00 Variable Cost Total $127,500.00 Contribution Margin $122,500.00 Fixed Expenses Fixed Overhead $30,000.00 Fixed Marketing Expenses $40,000.00 Scrap Cost $5,000.00 Total Fixed Expenses $75,000.00 Net Operating Income $47,500.00 Part 4B If the sales decrease because of the change in quality, how much of a reduction could Panalon handle and still keep their net operating income the same as before the supplier change? Original Net Operating Income $110,000-$70,000 $40,000.00 New Total Fixed Expenses $75,000.00 New Contribution Margin $40,000+$75,000 $115,000 Change in cost materials (10*(1-0.25))*5000 $37,500.00 New Sales $115,000+$127,500 $242,500 The reduction in sales that still keep $40,000 net operating income: Amount of Reduction $250,000-$242,500 $7,500 Units Reduced 7500/50 150 unitsExplanation / Answer
A.
B. Total Fixed Costs = $ 682,500.
Unit sales per month required to earn the same original profit = ( Fixed Expenses + Target Profit) / Unit Contribution Margin = $ ( 75,000 + 40,000) / $ 24.50 = 4,693.88 units
Maximum reduction in sales = 5,000 - 4,694 = 306 units.
C. Pros:
Cons:
1. New supplier, hence regularity of supplies might be affected.
2. If the sales per month falls below 4,694 units, the company would end up making lower profit than before.
Panlon Company Revised Contribution Margin Income Statement For the year ending December 31, 2018 $ $ Sales Revenue ( 5,000 x 12 x $ 50) 3,000,000 Less: Variable Expenses Direct Materials 450,000 Direct Labor 540,000 Manufacturing Overhead 300,000 Marketing Cost 240,000 Total Variable Expenses 1,530,000 Contribution Margin $ 1,470,000 Fixed Expenses Manufacturing Overhead 360,000 Marketing Cost 480,000 Scrap Cost 60,000 Total Fixed Expenses 900,000 Net Operating Income ( Loss) $ 570,000