Expert Answer:Case Study

  

Solved by verified expert:This case study is about a small manufacturing company. The concepts covered are contribution margin, fixed and variable costs, breakeven point, business decisions related to fixed and variable costs, and analysis of business decisions and results.Each question refers to the same initial data. Treat each question separately. 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. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. Leave any formulas used in the Excel files (do not hard code or type in results); The submission will be one Excel file covering all parts of the Case Study (multiple tabs can be used if desired). Only one Excel file should be submitted. No word documents or any other file types.
mba_6100_case_study_1___pots.docx

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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:
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.

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