Giulia is considering adding a new product line (wall hammers), which will also add some new costs. Adding the new product line does not have any impact on the sales volume and price of pitons. Giulia wants to know the minimum number of wall hammers she would need to sell to maintain the current gross margin level for the company (i.e., gross margin from the sales of Pitons only). Before adding the wall hammers, pitons were the only product the company manufactured. The estimated financial result for selling 4,200 pitons per month is shown below Annual Operating Results for Piton (4,200 units per month) (Based on Exhibit 3) Volume Unit Price Sales revenue 50,400 10.5 $ 529,200 Variable product costs Direct material 50,400 $ 1.45 $ 73,080 Var. Supply 50,400 $ 0.11 $ 5,544 Var. Energy 50,400 $ 0.18 $ 9,072 $ 87,696 Fixed product costs Direct labor 6 employees $ 57,500 $ 345,000 Depreciation Occupancy/Lease Fixed energy Gross Margin Gross margin (%) $ 14,355 $ 33,000 $ 20,736 $ 413,091 $ 28,413 5.37% Compute the minimum number of wall hammers Giulia wants to know (i.e., incremental revenue from wall hammers = incremental costs from wall hammers). you computed the number of hammers to sell to find a point of indifference to decide whether to add the hammers. Now, using Giulia's estimates and assumptions for piton and hammer production, determine the effect of adding the new wall hammer product line on the company's annual gross margin (in dollars and %). Prepare an annual income statement at the company level, assuming that Tenalpina sells both pitons and wall hammers. 3. Given the demand uncertainty, Giulia is concerned about the financial risk of adding the new product line. She wanted to evaluate the risk based on a breakeven and margin of safety point of view. Compute the breakeven (volume) and margin of safety for the whole company (TelAlpina) and each product line-assume the sales mix of 4,200 per month (92.3%) pitons for every 350 per month (7.7%) hammers will remain reasonably constant. How would you feel about the risk analysis result if you were in Giulia's shoes? Would it influence your decision to expand the product line? 4. Gross margin is one measure of profitability. When pitons are the company's only product, the gross margin is $0.564 per unit and 5.37%. a) Now, let's assume that wall hammers have been added. Employing the estimates and assumptions provided in the case, prepare the unit gross margin ($) and gross margin % for each product line, i.e., pitons and wall hammers. Note: Giulia decided to use direct labor time to allocate production costs other than direct materials for each product line to calculate product gross margin -37% of the total labor time for hammers and the remaining 63% for pitons (see page 4). b) Focusing on pitons, explain to Giulia why the gross margin for pitons changes after adding wall hammers.