Calibrated Manufacturing

Question 1:

$CM (before) = $20-$10 per unit

New Variable Cost = $5 + ($5 x 1.2) = $11

$CM (after expansion) = $20 - $11 = $9 per unit

Increase in Total Contribution Margin (9 x 4000) $36,000

Less Increase in Fixed Costs (8 x 1500) -$12,000

Net Profit Contribution from Expansion $24,000

Question 2:

%CM = 9/20 = .45 or 45%

Basic $BE = -10/45 + 10 = -.10/55 = -.18.18 or -18.2%

Unit BE = -.1818 x 14,000 = -2548 units

Notice that I have used a baseline of 14,000 units since this represents the demand at current price. You must also consider that a reduction in sales of this size enables the company to avoid five increases in semi-fixed costs (at $1,500 each) because 2500 fewer units of capacity would be required. To calculate the new dollar contribution margin per unit. It is $11: the new price, $22, minus the relevant variable costs, $11. The resulting break even which considers the semi-fixed costs would be:

Unit BE = -2548 + -5 x $1,500/11 = -3230 units

This indicates that the company can avoid still another 500 units of semi-fixed cost, so the final equation would be:

Unit BE = -2548 + -6 x $1,500/11 = -3,366 units

Question 3:

Calibrated might do better not to maximize its current profit. A price increase could attract new competitors. Alternatively, it could enable current competitors to gain larger volumes that would enable them to gain cost advantages (due to economies of experience) over Calibrated in the long run.

Question 4:

Calibrated’s expenditures on semi-fixed costs could become sunk. If demand weakened, Calibrated still would have to bear the cost of maintaining that excess capacity.