Problem:
Susan Young is an attorney for a small law firm in Arizona. She is also a part-time inventor and an avid golfer. One day Susan's golf foursome included a man named Henry Jones, a manufacturer of Christmas ornaments. Henry explained to Susan that he manufactures an ornament everyone loves, but stores will not carry the ornaments because they are very fragile and often break during shipping. Susan told Henry about a plastic box she had developed recently that would protect such fragile items during shipping. After crash testing the plastic box, Henry offered Susan a contract to purchase 100,000 of the boxes for $2.20 each. Susan is convinced that the box has many applications and that she can obtain future orders. Production of the plastic boxes will take one year. Estimated costs for the first year are as follows:
Lease payments on building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 800 per month
Lease payments on machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,200 per month
Cost to retool machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000
Depreciation on machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $ 9,600
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.70 per box
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..$ 0.30 per box
Indirect materials and other manufacturing overhead . . . . . . . . . . . . .. $10,000
Interest on loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500
Administrative salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$15,000
- Using the information provided, determine Susan's contribution margin and projected profit at a sales level of 100,000 boxes.
- If Susan's salary as an attorney is $44,500, determine how many boxes Susan must sell to earn profits equal to her salary.