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Homework answers / question archive / Decision making Highland Park Kitchen Supply (HPKS) produces stoves for commercial kitchens

Decision making Highland Park Kitchen Supply (HPKS) produces stoves for commercial kitchens

Finance

Decision making

Highland Park Kitchen Supply (HPKS) produces stoves for commercial kitchens. The costs to manufacture and market the stoves at the company’s normal volume of 6000 units per month are shown in the following table:

 

Unit Manufacturing Costs

 

 

 

 

 

 

 

Variable Materials

 

$50  

 

Variable labor

 

$75  

 

Variable overhead

 

$25  

 

Fixed overhead

 

$60  

 

 

 

 

 

Total manufacturing costs

 

 

$210 

 

 

 

 

Unit marketing costs

 

 

 

 

 

 

 

Variable

 

$25  

 

Fixed

 

$70  

 

Total unit marketing costs

 

 

$95 

 

 

 

 

Total unit costs

 

 

$305 

 

The normal selling price is $370 per unit. Ignore income taxes and any costs not stated explicitly above.

 

Required  

 

 

  1. Compute the breakeven point in unit terms & contribution margin ratio. Assuming that the company produces and sells 6,000 units, what is the margin of safety ratio?   

 

  1. Now assume that the tax rate is 35%. What is the volume required to achieve a net income of $204,750?

 

 

  1. Assume that the sales volume will be 6,000 units and ignore income taxes. What production volume would generate a higher income of $ 60,000 for the absorption costing income statement, as compared to the variable costing income statement?

 

  1. Go back to the base data. Assume the company can increase sales to 7000 units by reducing the selling price to $325. Fixed costs would remains the same at the increased volume levels. Would this make the company better off than selling 6,000 units at $370 per unit?

 

  1. Go back to the base data. A proposal is received from an outside contractor who will make and ship 2000 stoves per month directly to HPKS customers as orders are received from HPKS’s sales forc The company’s fixed marketing costs are unaffected but the variable marketing costs would be cut by 20% for these 2000 units manufactured by the contractor. If the offer is accepted, HPKS’s plant would operate at two-thirds of its normal volume and total fixed manufacturing cost would be cut by 30%. 

 

    1. What in-house unit cost should be used for comparison with the manufacturer’s unit cost of supply; i.e., what is the unit cost that the firm can avoid by outsourcing production of these 2,000 units?

 

    1. Should the proposal be accepted for a payment to the contractor of $215 per unit (contractor’s selling price)?

 

  1. Go back to the base data. An inventory of 460 units of an obsolete model of the stove remains in the stockroom. These must be sold through regular marketing channels at reduced prices or the inventory will soon be valueless. The company will incur variable marketing costs. What is the minimum acceptable selling price for these units? 

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