MBA 6100 Case Study #1

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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.

Data for all questions:  Herschel’s Hammers produces hammers with wooden handles.  Their wood handled hammers are sold at many local hardware stores.  The cost of manufacturing and marketing their wood handled hammers, at their normal factory volume of 5,000 hammers per month, is shown in the table below.  These hammers sell for $20 each.  Herschel’s Hammers is making a small profit, but would prefer to increase profitability.

(Note:  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.)

Question 1:  What is the break-even point?  A) In units?  B) In sales dollars?

Question 2:  A large construction firm has offered to purchase 3,000 hammers (one time) if the price was lowered to $18 per hammer.  Herschel’s Hammers’ maximum capacity is 6,000 units.  A) Based on the cost data provided, what would be the impact of the price decrease on sales, costs, and operating income if Herschel’s Hammers accepted this sale?  Use a contribution margin income statement to show your results. B) Do you think Herschel’s Hammers should accept this sale?  Support your decision with evidence and analysis.

Question 3:  Research has shown that there is a need for a fiberglass handled hammer on the market.  Herschel’s Hammers would be able to produce a fiberglass handled hammer on their existing assembly line if they purchased a new machine to fabricate the fiberglass handles.  This would increase fixed overhead costs by $15,000 per month (still based on normal production volume of 5,000 units).  The variable materials costs for the fiberglass would also be double the cost of the variable materials for the wooden handles.  Maximum production for both types of hammers together would still be 6,000 units because the same assembly line would be used.  The fiberglass handled hammers would sell for $30 each.  A)  What would be the break-even point if Hershel’s Hammers only sold fiberglass handled hammers?  B) Create a contribution income statement for a month in which Herschel’s Hammers sold 2,500 wooden handled hammers, and 3,000 fiberglass handled hammers.  C)  Explain, in your own words, how the changes to fixed and variable costs for the fiberglass handled hammers impacts profitability.

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