You are going to open a business making custom cabinets. You can sell each cabinet for $80.
It takes a cabinetmaker approximately 45 minutes to make one cabinet. Each cabinetmaker
works an 8-hour day earning $18 per hour. Each cabinet uses $25 in raw materials. You
usually produce cabinets 20 days a month and can employ two cabinetmakers. You estimate
that your fixed costs are $5,000 per month.
a. What is your contribution margin?
b. How many cabinets must you make each month to break even?
c. What is your total monthly revenue if you want to earn a $2,000 profit?
d. Construct a break-even chart for the custom cabinet firm.
solutions please
You are going to open a business making custom cabinets. You can sell each cabinet for $80. It takes a cabinet-maker approximately 45 minutes to make one cabinet. Each cabinet-maker works an eight-hour day, earning $18 per hour. Each cabinet will use $25 in raw materials. You usually produce cabinets 20 days a month and can employ two cabinet-makers. You estimate that your fixed costs are $5,000 per month
a. To calculate the contribution margin, we need to determine the total cost per cabinet first.
The total cost per cabinet is the sum of labor cost and material cost per cabinet.
Labor cost per cabinet = (time to make one cabinet / time worked per month) * (number of workers * monthly wage per worker)
Labor cost per cabinet = (45 minutes / 60 minutes) * (2 cabinetmakers * $18 per hour * 8 hours per day * 20 days per month)
Material cost per cabinet = $25 per cabinet
Total cost per cabinet = labor cost per cabinet + material cost per cabinet
After calculating the total cost per cabinet, we can find the contribution margin using the formula:
Contribution margin = Selling price per cabinet - Total cost per cabinet
b. To calculate the number of cabinets needed to break even, we need to consider the fixed costs and the contribution margin.
Breakeven point (in units) = Fixed costs / Contribution margin
c. To calculate the total monthly revenue needed to earn a $2,000 profit, we need to consider the fixed costs, the desired profit, and the contribution margin.
Total monthly revenue = Fixed costs + Desired profit / Contribution margin
d. To construct a break-even chart, we can plot the number of cabinets produced (x-axis) against the total cost (fixed costs + variable costs) and total revenue (y-axis) on a graph. The point where the total cost line intersects the total revenue line represents the break-even point.