Artistic Woodcrafting, Inc., began in 2002 as a one-person cabinet-making operation. Employees were added as the business expanded. By 2005, sales volume totaled

$850,000. Volume for the first five months of 2006 totaled $600,000, and sales were expected to be $1.6 million for the entire year. Unfortunately, the cabinet business in the region where Artistic Woodcrafting is located is highly competitive. More than 200 cabinet shops are all competing for the same business.

Artistic currently offers two different quality grades of cabinets: Grade I and Grade II, with Grade I being the higher quality. The average unit selling prices, unit variable costs, and direct fixed costs are as follows:

Unit Price           Unit  Variable Cost             Direct Fixed Cost

Grade I	$3,400	$2,686	$95,000
Grade II	1,600	1,328	95,000

Common fixed costs (fixed costs not traceable to either cabinet) are $35,000. Cur- rently, for every three Grade I cabinets sold, seven Grade II cabinets are sold.

 

Required

1.    Calculate the Grade I and Grade II cabinets that are expected to be sold during 2006.

2.    Calculate the number of Grade I and Grade II cabinets that must be sold for the company to break even.

3.    Artistic Woodcrafting can buy computer-controlled machines that will make doors, drawers, and frames. If the machines are purchased, the variable costs for each type of cabinet will decrease by 9 percent, but common fixed costs will increase by $44,000. Compute the effect on operating income in 2006, and also calculate the new break-even point. Assume the machines are purchased at the beginning of the sixth month. Fixed costs for the company are incurred uni- formly throughout the year.

4.    Refer to the original data. Artistic Woodcrafting is considering adding a retail outlet. This will increase common fixed costs by $70,000 per year. As a result of adding the retail outlet, the additional publicity and emphasis on quality will allow the firm to change the sales mix to 1:1. The retail outlet is also expected to increase sales by 30 percent. Assume that the outlet is opened at the begin- ning of the sixth month. Calculate the effect on the company’s expected profits for 2006, and calculate the new break-even point. Assume that fixed costs are incurred uniformly throughout the year.