MBA 6100 Case Study #1 Spring 2020 Block 1

Each question refers to the same initial data. Treat each Part individually. Ignore income taxes. Assume no beginning or ending inventories. Unless stated otherwise, all calculations and income statements should be based on a one-month period. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting – example below. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel. One Excel file is to be submitted for this case study. No additional files (Word documents or otherwise) will be accepted or graded. This case study is worth 100 points total.

Contribution Margin Format Example:

Data for all questions: TrailPacker produces rugged backpacks for outdoor sports (hiking, rock climbing, etc.) Their backpacks are sold at many specialty outdoor stores across the country. The cost of manufacturing and marketing their backpacks, at their normal factory volume of 20,000 backpacks per month, is shown in the table below. TrailPacker sells these backpacks for $50 each. TrailPacker is making a small profit, but they would prefer to increase their Operating Income.

Hint: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.

Data for all Questions:


Part 1: (24 points)

A) TrailPacker wants to understand their basic starting financial data. What is their monthly fixed cost, variable cost per backpack, and contribution margin per backpack? Show your calculations for each.

B) Prepare a one-month Contribution Margin Income Statement for the company using the given financial data at their normal factory volume. Include line items for each type of cost as well as subtotals for the variable and fixed costs.

C) What is the break-even point in units? (Show your calculations.)

D) What is the break-even point in sales dollars? (Show your calculations.)

E) Using a one-month Contribution Margin Income Statement, verify that your calculated break-even volume results in Operating Income of Zero. (Prepare the entire Contribution Margin statement at the break-even level.)

Part 2: (20 points)

An online superstore has offered to purchase 15,000 backpacks (one time in one month) if the sales price was lowered to $40 per backpack for that one-time sale. (This specific sale is all or nothing – they will not purchase less than 15,000 backpacks). TrailPacker’s maximum capacity is 25,000 units, and this special sale would not impact the sales price of TrailPacker’s normal sales to their usual customer base.

A) List TrailPacker’s options based on this Special Sale offer, their maximum capacity, and their usual production. (For example, one option is that TrailPacker can not accept the special sale and continue with their usual monthly sale to the outdoor retailers.) There should be at least 3 options – including the example provided.

B) Prepare a monthly contribution margin income statement for each of the options in A. Label each option.

C) Do you think TrailPacker should accept this sale? Why? Support your decision with evidence and analysis.

Hint: Compare your new contribution margin income statement(s) including the special sale to the company’s normal contribution margin income statement (from Part 1).

Part 3: (24 points)

TrailPacker is thinking of increasing sales by offering backpacks with aluminum frames. The investment needed for adding aluminum frames to their manufacturing process would increase fixed overhead costs by $50,000 per month. The variable materials cost (only variable material costs – not all variable costs) would increase by $15.00 per backpack. Market research estimates that the aluminum frame backpacks would sell for $70 each, and volume would increase 10%.

A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, detailed costs and income if TrailPacker chooses to manufacture and sell backpacks with aluminum frames instead of their regular backpacks.

B) What is the new break-even point in units for the aluminum frame backpacks?

C) What is the new break-even point in sales dollars for the aluminum frame backpacks?

D) If volume did not increase when making the aluminum frame backpacks (stayed the same as original monthly volume), is TrailPacker better off producing aluminum frame backpacks or their basic backpacks? Support your answer with data in contribution margin income statement format.

Part 4: (32 points)

TrailPacker is thinking of cutting costs by using a different fabric (raw material) supplier. Their variable material costs would decrease by 30% (only variable material costs – not all variable costs). The quality of the fabric is lower, so TrailPacker estimates that their additional fixed scrap costs related to the fabric quality would be $25,000 per month. They would not change the pricing of their backpacks.

Note: Use the initial data provided for all questions. Ignore the special sale and aluminum frame data from Parts 2 & 3.

A) Prepare a revised monthly Contribution Margin Income Statement to include the revenues, costs and profits of using the different raw material (fabric) supplier.

B) If their sales end up decreasing because of the change in quality, how much of a reduction in sales (dollars and units) could TrailPacker handle and still keep their net operating income the same as before the supplier change? Show your data in a Contribution Margin Income Statement.

C) Write a memo to the CFO that presents the pros and cons of the potential supplier change. Include the potential impacts on revenue, costs, and operating income, as well as any other factors or consequences of this decision. Be sure to include quantitative evidence and backup as well as any qualitative analysis.

Note: Your letter will be included in your Excel document – either in the Excel cells or in a text box.

Hint: The analysis is expected to be thorough. Expect to present approximately 400 words, and support your analysis with data (either given or calculated). Remember that this is a letter to the CFO, so proper grammar and spelling is expected.