Contribution Margin Format Example:

Volume XX

Sales XX

Variable Costs (Listed) XX

Variable Costs (Total) XX

Contribution Margin XX

Fixed Costs (Listed) XX

Fixed Costs (Total) XX

Operating Income XX

Data for all questions:

Stuckie produces white school glue. Their glue bottles are primarily sold at department stores across the country. The cost of manufacturing and marketing their glue, at their normal factory volume of 20,000,000 bottles of glue per month, is shown in the table below. Stuckie sells their glue bottles for $1.50 each. Stuckie is making a small profit, but they would prefer to increase their Operating Income.

Hint: 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.

Per Unit Per Unit

Unit Manufacturing Costs:

Variable Materials $0.30

Variable Labor $0.35

Variable Overhead $0.10

Fixed Overhead $0.25

Total Unit Manufacturing Costs: $1.00

Unit Marketing Costs:

Variable Marketing Costs $.05

Fixed Marketing Costs $.20

Total Unit Marketing Costs: $.025

Stuckies is thinking of cutting costs by switching to a different material supplier. Their variable material costs would decrease by 50% (only variable material costs not all variable costs). The quality of the ingredients is lower, so Stuckies estimates that their additional fixed scrap costs related to the ingredient quality would be $1,000,000 per month. They would not change the pricing of their glue bottles.

A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, costs and profits of using the different raw material (ingredient) supplier. (At normal volume.)

B) What is the break-even point in units? (Show your calculations.)

C) What is the break-even point in sales dollars? (Show your calculations.)

D) If their sales end up decreasing because of the change in quality, how much of a reduction in sales (dollars and units) could Stuckies handle and keep their net operating income the same as before the supplier change? Show your data in a Contribution Margin Income Statement.

E) What are the potential impacts both Qualitative and Quantitative of the material supplier change? If you had to make the decision of whether to switch suppliers or not, what would you do? Why?