Case Analysis

on
Artistic Woodcrafting Inc.
(Case #7- Cost-Volume-Profit)

I. SYNTHESIS

A. Introduction

Artistic Woodcrafting Inc. began several years ago as a one-person, cabinet-

making operation. Employees were added as the business expanded. Last year, sales
volume totaled $850,000. Volume for the first five months of the current year totaled
$600,000, and sales were expected to be $1.6 million for the entire year. Unfortunately,
the cabinet business in the region where Artistic is located is highly competitive. More
than 200 cabinet shops are all competing for the same business. Artistic currently offers
two different quality grades of cabinets: Grade I and Grade II, with Grade I being the
higher quality.

b. Case Facts/Information

Unit Variable Direct Fixed

Unit Price Cost Cost
Grade I $ 3,400.00 $ 2,686.00 $ 95,000.00
Grade II 1,600.00 1,328.00 95,000.00

 Common fixed cost are $ 35,000.

 Currently, for every three Grade I cabinets sold, seven Grade II cabinets are sold.

II. POINT OF VIEW

The group is taking the point of view of the management of Artistic Woodcrafting Inc.

III. PROBLEM STATEMENT

 What can the management do to manage risk and uncertainty, determine and maintain
break-even point at a low level and increase its expected profits for the current year?

IV. OBJECTIVES

1. To determine the break-even point where total costs equal total sales revenue.
2. To apply CVP analysis on a multi-product setting.
3. To apply sensitivity analysis which allows managers to vary costs, prices, and sales mix
to show various possible break-even points.
4. To decrease the break-even point by increasing sales of high contribution margin and
decreasing sale so of low contribution margin
V. AREAS OF CONSIDERATION

A. ANALYSIS

● Stakeholders
o The owner of Artistic Woodcrafting Inc.
- to evaluate how well their business venture is performing
o The management of Artistic Woodcrafting Inc. (especially the sales and
production department)
- to allocate the financial, human and capital resources towards competing
needs of the business based on their budgets
o The employees and future employees
- implications for their job security and income
o The suppliers and customers
- continuity of business relationship

● Conceptual and Computational Analysis

1. Expected units to be sold during the current year for Grade I and Grade II
cabinets based on the target sales of $1,600,000.00 for the year

Formula:
Let the cabinets be = X
Total sales = 0.30X * Selling Price of Grade I + 0.70X * Selling Price of Grade II
$1,600,000.00 = 0.30 X ($3,400) + 0.70 X ($1,600)
$1,600,000.00 = $1,020X + $1,120X
$1,600,000.00 = $2,140X
X = $1,600,000.00 ÷ $ 2,140
X = 748 cabinets (rounded off)

Grade I: 0.30 × 748 = 224 cabinets (rounded off)

Grade II: 0.70 × 748 = 524 cabinets (rounded off)

2. Breakeven point analysis (current scenario)

Contributio Sale
Variable n s Total

Product Price – Cost = Margin × Mix = CM

$3,40
Grade I 0 $2,686 $714 0.3 $ 214

Grade II 1,600 1,328 272 0.7 190

Total $ 405
Direct fixed cost—I $ 95,000
Direct fixed cost—II 95,000
Common fixed cost 35,000
 Total fixed cost $ 225,000

Breakeven point calculation:

Total Fixed Cost ÷ Contribution Margin per Unit = Total Breakeven units
$225,000 ÷ $405 = 556 cabinets or 56 packages

Grade I: 0.30 × 556 = 167 cabinets (rounded off)

Grade II: 0.70 × 556 = 389 cabinets (rounded off)

Checking:
Grade I: (167 * $714) 119,238.00
Grade II: (389 * 272) 105,808.00
Total Contribution Margin 225,046.00
Total Fixed Costs 225,000.00
Profit/ Loss 46.00 (due to rounding)

3. Artistic can buy computer-controlled machines that will make doors, drawers, and
frames. If the machines are purchased, the variable costs for each type of
cabinet will decrease by 9%, but common fixed cost will increase by $44,000.
Compute the effect on operating income, and also calculate the new break-even
point. Assume the machines are purchased at the beginning of the sixth month.
Fixed costs for the company are incurred uniformly throughout the year.

a. Sensitivity Analysis (Effect on operating income):

Variable Contribution Sales Total
Product Price – Cost = Margin × Mix = CM
Grade I $3,400 $2,444 $956 0.30 $ 287
Grade II 1,600 1,208 392 0.70 $ 274
Total $ 561

* Grade I = $2,868 * (100%-9%) = $2,444 (Rounded off)

* Grade II = $1,328 * (100%-9%) = $1,208 (Rounded off)

Formula:
Let the cabinets be = X
Total Remaining sales = 0.30X * Selling Price of Grade I + 0.70X * Selling Price of Grade II
$1,600,000.00 - $600,000 = 0.30 X ($3,400) + 0.70 X ($1,600)
$1,000,000.00 = $1,020X + $1,120X
$1,000,000.00 = $2,140X
X = $1,000,000.00 ÷ $ 2,140
X = 467 cabinets remaining (rounded off)

Grade I: 0.30 × 467 = 140 cabinets (rounded off)

Grade II: 0.70 × 467 = 327 cabinets (rounded off)
Additional Contribution Margin:

Grade I 140 x ($956-$714) $ 33,880.00

Grade II 327 x ($392-$272) $ 39,240.00
Increase in
Contribution
Margin $ 73,120.00

Additional Fixed Cost = $44,000

Net effect on income = $73,120 - $44,000 = $29,120

b. New breakeven point

1. Breakeven point calculation for the whole year assuming there was no
$600,000 sales in the first 5 months:
Total Fixed Cost ÷ Contribution Margin per Unit = Total Breakeven units
($225,000+$44,000) ÷ $561 = 480 cabinets or 48 packages

Grade I: 0.30 × 480 = 144 cabinets (rounded off)

Grade II: 0.70 × 480 = 336 cabinets (rounded off)

Checking:
Grade I: (144 * $956) 137,664.00
Grade II: (336 * 392) 131,712.00
Total Contribution Margin 269,376.00
Total Fixed Costs 269,000.00
Profit/ Loss 376.0 due to rounding off)

2. If the new break-even point is interpreted as a revised break-even point for

the current year, then total fixed cost must be reduced by the contribution
margin already earned (through the first five months) to obtain the units that
must be sold for the last seven months. These units would then be added to
those sold during the first five months:

Contribution Margin Earned

= $600,000 – ((224-140) × $2,686)) – ((524-327) × $1,328))
= $600,000 - $225,624 - $261,616
= $112 760
Formula:

Total Fixed Cost less Contribution Margin Earned ÷ New Contribution Margin per Unit = Total
Additional Units to Breakeven
($225,000+$44,000-$112,760) ÷ $561 = 279 cabinets

Grade I: 0.30 × 279 = 84 cabinets (rounded off)

Grade II: 0.70 × 279 = 195 cabinets (rounded off)
 Grade I: 84 cabinets (initial) + 84 cabinets (additional) = 168 cabinets
Grade II: 197 cabinets (initial) + 195 cabinets (additional) = 392 cabinets
For a total of 560 cabinets or 56 packages to breakeven

Checking:
INITIAL SALES 600,000.00
GRADE I COST ((224-140)*2686)) 225,624.00
GRADE I COST ((524-327)*1328)) 261,616.00
INITIAL CONTRIBUTION MARGIN 112,760.00
ADD'L CONTRIBUTION MARGIN GRADE I
(84 x 956) 80,304.00
ADD'L CONTRIBUTION MARGIN GRADE II
(195 x 392) 76,440.00
TOTAL CONTIBUTION MARGIN 269,504.00
TOTAL FIXED COSTS ($225,000+$44,000) 269,000.00

PROFIT / LOSS 504.00 (Due to rounding off)

4. Refer to the original data. Artistic is considering adding a retail outlet. This will
increase common fixed cost by $70,000 per year. As a result of adding the retail
outlet, the additional publicity and emphasis on quality will allow the firm to change
the sales mix to 1:1. The retail outlet is also expected to increase sales by 30%.
Assume that the outlet is opened at the beginning of the sixth month. Calculate
the effect on the company’s expected profits for the current year, and calculate the
new break-even point. Assume that fixed costs are incurred uniformly throughout
the year.

Contributio
Variable n Sales Total
Product Price – Cost = Margin × Mix = CM

GRADE I $3,400 $2,686 $714 0.50 $357

GRADE II 1,600 $1,328 272 0.50 136

TOTAL $493

New sales revenue= $1,000,000 * 130% = $1,300,000.00

Formula:
Let the cabinets be = X
Total sales = 0.50X * Selling Price of Grade I + 0.50X * Selling Price of Grade II
$1,300,000.00 = 0.30 X ($3,400) + 0.70 X ($1,600)
$1,300,000.00 = $1,700X + $800X
$1,300,000.00 = $2,500X
 X = $1,300,000.00 ÷ $ 2,500
X = 520 cabinets or 260 packages

Grade I: 0.50 × 520 = 260 cabinets

Grade II: 0.50 × 520 = 260 cabinets

Effect on profits:

Change in contribution margin:

$67,45
[$714 × (260 – 140)] + [$272 × (260 - 327)] 6

Increase in fixed costs:

$70,000 × (7/12) 40,833

$26,62
Increase in operating income 3

1. Breakeven point calculation for the whole year assuming there was no
$600,000 sales in the first 5 months:

Total Fixed Cost ÷ Contribution Margin per Unit = Total Breakeven units
$295,000 ÷ $493 = 598 cabinets (rounded off) or 299 packages

Grade I: 0.50 × 598 = 299 cabinets

Grade II: 0.50 × 598 = 299 cabinets

2. If the new break-even point is interpreted as a revised break-even point for

the current year, then total fixed cost must be reduced by the contribution
margin already earned (through the first five months) to obtain the units that
must be sold for the last seven months. These units would then be added to
those sold during the first five months:

Total Fixed Cost less Contribution Margin Earned ÷ New Contribution Margin per Unit = Total
Additional Units to Breakeven
($295,000- $112,760) ÷ $493 = 370 cabinets remaining (rounded off) or 185
packages

Grade I: 0.50 × 370 = 185 cabinets

Grade II: 0.50 × 370 = 185 cabinets

INITIAL SALES 600,000.00

GRADE I COST ((224-140)*2686)) 225,624.00

 GRADE I COST ((524-327)*1328)) 261,616.00

INITIAL CONTRIBUTION MARGIN 112,760.00

ADD'L CONTRIBUTION MARGIN GRADE I
(185 x 714) 132,090.00

ADD'L CONTRIBUTION MARGIN GRADE II

(185 x 272) 50,320.00

TOTAL CONTIBUTION MARGIN 295,170.00

TOTAL FIXED COSTS ($225,000+ $70,000) 295,000.00

PROFIT / LOSS 170.00 (Due to rounding off)

B. ASSUMPTIONS

1.

C. SWOT ANALYSIS

STRENGTH WEAKNESSES

1. 1.
2. 2.
3. 3.

OPPORTUNITIES THREATS

1. 1.
2. 2.
3. 3.

VI. ALTERNATIVE COURSES OF ACTION

1. Status quo

Pros:
 Cons:

2. Develop

Pros:

Cons:

3.

Pros:

Cons:

Criteria Weight ACA1 ACA2 ACA3

Process
improvement

Cost
Accuracy

Ease of
implementati
on

Cost-Benefit

TOTAL 100% 67% 85% 79%

VII. RECOMMENDATION

The group recommends ACA ___, for the following reasons:

VIII. IMPLEMENTATION PLAN

METHODS/ACTION STEPS

IX. LEARNING POINTS