MBA 6100 Case Study #1 Summer 2021 Block 1 Each question refers to the same initial data. Treat each Part individually. Ignore income taxes. Assume no beginning or ending inventories. Unless stated otherwise, all calculations and income statements should be based on a one-month period. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting example below. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. One Excel file is to be submitted for this case study. No additional files (Word documents or otherwise) will be accepted or graded. This case study is worth 100 points total. Contribution Margin Format Example: Data for all questions: Colorall produces markers in a variety of colors. Their boxes of markers are primarily sold at department stores across the country. The cost of manufacturing and marketing their markers, at their normal factory volume of 3,000,000 boxes of markers per month, is shown in the table below. Colorall sells their boxes of markers for $5.00 each. Colorall 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. Data for all Questions: Questions: Question 1: (30 points) A) Colorall wants to understand their basic starting financial data. What is their monthly fixed cost, variable cost per box of markers, and contribution margin per box of markers? Show your calculations for each. B) Prepare a one-month Contribution Margin Income Statement for the company using the given financial data at their normal factory volume. Include line items for each type of cost as well as subtotals for the variable and fixed costs. C) What is the break-even point in units? (Show your calculations.) D) What is the break-even point in sales dollars? (Show your calculations.) E) Using a one-month Contribution Margin Income Statement, verify that your calculated break-even volume results in Operating Income of Zero. (Prepare the entire Contribution Margin statement at the break-even level.) Question 2: (24 points) Colorall has developed some new pastel colors, and would like to create larger boxes of markers to include more colors of markers in the box. Colorall would like to offer larger boxes of markers to their customers. In order to have a second box size option, Colorall would need to invest in a new packaging line. This would increase fixed overhead costs by $2,000,000 per month. All variable costs (materials, labor, overhead & marketing) would increase 2X (200%) because of the bigger boxes and additional markers put into each box. Market research estimates that 2,000,000 of the larger boxes of markers could be sold per month. Colorall estimates that the new boxes of markers would sell for $9.50 each. A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, detailed costs and income if Colorall chooses to manufacture and sell the larger boxes of markers instead of their normal sized box. B) What is the new break-even point in units for the larger boxes of markers? (Show your calculation.) C) What is the new break-even point in sales dollars for the larger boxes of markers? (Show your calculation.) D) If volume did not increase when making the larger boxes of markers (stayed the same as the original monthly volume), is Colorall better off producing the original boxes of markers or the larger boxes of markers? Why? Support your answer with data in contribution margin income statement format. Question 3: (24 points) Colorall 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 Colorall estimates that their additional fixed scrap costs related to the ingredient quality would be $1,500,000 per month. They would not change the pricing of their boxes of markers. Note: Use the initial data provided for all questions. Ignore the larger box data from Question 2. 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 new break-even point in units with the supplier change? (Show your calculations.) C) What is the new break-even point in sales dollars with the supplier change? (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 Colorall handle and still keep their net operating income the same as before the supplier change? Show your data in a Contribution Margin Income Statement. Question 4: (22 points) A) Using the contribution margin income statements for the original boxes of markers (Question 1), the larger boxes of markers (Question 2), and the original boxes of markers with the supplier change (Question 3), compare the various options for Colorall. Which scenario is the most profitable? Which is the least profitable? B) What are some potential non-financial metrics or data that could influence Coloralls decisions? How could these influence Colorall in a direction different than the financial data? C) Write a memo to the CFO that presents the pros and cons of the potential supplier change (Question 3). Include the potential impacts on revenue, costs, and operating income, as well as any other factors or consequences of this decision. Be sure to include quantitative evidence and backup as well as any qualitative (non-financial) analysis. Because this is a letter to the CFO, correct grammar and spelling is expected with thorough explanations. Note: Your letter will be included in your Excel document either in the Excel cells or in a text box.