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Robin Simmons is ready to complete a cost-volume-profit analysis for 2016 for the Stellar Packaging Products manufacturing plant to determine if the break-even point is achieved, given the expected decline in volume. Specific costs for production of 500,000 units include the following:

Stellar Packaging Products

Variable Costs Total

Fixed Costs Total

 Raw materials

 $         400,000

 

 Direct manufacturing labor

 $         200,000

 

 Indirect manufacturing labor

 

 $           105,000

 Factory Insurance & Utilities

 

 $            63,000

 Depreciation — Machinery and factory

 

 $            38,500

 Repairs and maintenance — factory

 

 $            28,000

 Selling, marketing and distribution expenses

 $            40,000

 $            80,000

 General and administrative expenses

 

 $           120,000

There are no beginning or ending inventories. The total sales for 500,000 units produced are $2,000,000.

Instructions:

Answer the following questions given the fact pattern above, showing all calculations.

  1. What is the contribution margin per unit for each chocolate bar produced, given the fact pattern above?
  2. What is the Stellar Packaging’s U.S. division break-even point in units and dollars, given the fact pattern above?
  3. What is the Stellar Packaging’s U.S. division margin of safety and degree of operating leverage, given the fact pattern above?
  4. Write a brief explanation (approximately two paragraphs) that Simmons might deliver to management to inform them of the analytical outcome, given the projected revenue and cost. Does the company have to implement a cost-reduction strategy in order to break even?

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