Cecelia’s Custom Cabinets specializes in making handcrafted custom cabinets for the discriminating homeowner. Over time, the owner of Cecelia’s Custom Cabinets, Cecelia Tyson, has developed a strong reputation for superior craftsmanship and attention to detail—Cecilia uses only the finest hardwood materials and employs only the most expert carpenters.

Currently, Cecelia and her staff do most of their work with hand tools and only sparingly use sophisticated woodworking machines.

Given the recent advances in woodworking technology, Cecelia is considering buying some state-of-the-art planning and cornicing machines. Cecelia believes that these machines will not only reduce the amount of time she and her staff spend on making cabinets but also will significantly reduce the level of scrap and wasted materials.

Under her current cost structure (i.e., without the new machines), Cecelia estimates that her fixed costs average $36,000 per month and that her contribution margin ratio is 40%. If Cecelia acquires the woodworking machines, then her fixed costs would increase to $60,000 per month; however, her contribution margin ratio would also increase to 60%.

Required:

a. What is Cecelia’s monthly breakeven revenue under her current cost structure? What would Cecelia’s monthly breakeven revenue be if she acquired the new machines?

b. Which cost structure would you recommend to Cecelia if her monthly revenue was $95,000? Which cost structure would you recommend to Cecelia if her monthly revenue was $150,000?

c. Calculate the sales level at which Cecelia is indifferent (that is, has the same profit) under both cost structures.