String Thing Corporation produces electric guitars. Their “Flying Z” style guitars are mainly used for students and guitar players looking for an inexpensive practice guitar. The cost of manufacturing and marketing their guitars, at their normal factory volume of 5,000“Flying Z” guitars per month, is shown in the table below. These guitars sell for $300 each.
Required:
Research has shown that there is a need for a higher quality guitar on the market. String Thing would be able to produce a higher quality guitar, called the “Les Doug” on their existing equipment if they upgraded the wood and strings at an additional cost of $20 per guitar. However, they would need a new paint booth to be able to produce the better paint job required for the “Les Doug” guitar. This would increase fixed overhead costs by $50,000 per month. Maximum production for both types of guitars together would be 6,000 units because the majority of the same equipment would be used. The “Les Doug” guitars would sell for $400 each.
A) What would be the break-even point if String Thing only sold “Les Doug” guitars?
B) Create a contribution income statement for a month in which String Thing sold 3,500 “Flying Z” guitars, and 2,000 “Les Doug” guitars.
C) Explain, in your own words, the difference between fixed and variable costs and how they impact profitability.