Financial Case Study: Mendel Paper Company

Mendel Paper Company

Mendel Paper Company
Contribution margin is equal to revenue minus certain costs. The following is the contribution margins by product line for the next fiscal quarter for Mendel Paper Company.
Computer Paper = 30,000 units x $14.00 = $420,000 30,000 units x $6.00 = $180,000 420,000 – 180,000 = $240,000 contribution margin (cm)
Napkins = 120,000 units x $7.00 = $840,000 120,000 units x $4.50 = $540,000 840,000 – 540,000 = $300,000 cm
Place mats = 45,000 x $12.00 = $540,000 45,000 x 3.60 = $162,000 540,000 – 162,000 = $378,000 cm
Poster board = 80,000 x $8.50 =$680,000
80,000 x 2.50 = $200,000 680,000 – 200,000 = $480,000 cm
One needs to add all the contribution margins for each unit and subtract the fixed plant and the fixed selling and administrative expenses to find the total contribution margin for Mendel Paper Company.
240,000 + 300,000 + 378,000 + 480,000 = $1,398,000 – 420,000 – 118,000 = $860,000 total contribution margin
Next one has to find out the contribution margin per unit.
Computer paper can complete six units per hour and they sell them for $14.00 with the variable overhead costing $9 per hour. 6 x 14.00 – 9.00 = $75.00
cm
Napkins can do 10 units per hour and sell for $7 with variable overhead costing $6. 10 x 7 – 6 = $64 cm
Place mats can produce five per hour, they sell for $12 each, and the variable overhead is $12. 5 x 12 – 12 = $48 cm
Poster board can complete four per hour and they sell for $8.50 each with a variable overhead of $8. 4 x 8.50 – 8.00 = $26 cm
Mendel Paper Company’s vice president found out that two of the four products had an increase in the cost of the material and one product had an increase for orders. Because of the new information, the company wanted contribution margins using the new information. The following are those new contribution margins.
Computer paper is 35,000 units selling for $14 each and the material cost per unit is $7
35,000 x 14 = 490,000
35,000 x 7 = 245,000
490,000 – 245,000 = $245,000 cm
Napkins contribution is $300,000. It stayed the same and the poster board contribution margin stayed the same at $480,000.
The place mats changed because the material cost went up. They estimate 45,000 units selling for $12 each with materials costing $4 each.
45,000 x 12 = 540,000
45,000 x 4 = 180,000
540,000 – 180,000 = $360,000 cm
Then one has to add all those contribution margins up and subtract the fixed costs to find the total contribution margin. 245,000 + 300,000 + 360,000 + 480,000 = 1,385,000 – 420,000 – 118,000 = $847,000 total contribution margin
Next Mendel Paper Company wants to know the break-even and margin of safety for each of the estimates. This includes the original and revised estimates.
For the computer paper the break-even point is figured by taking the amount, they sell the units for and subtracting the material cost then divide that by the contribution margin that was figured in the first part of this paper. This process can be used to figure out the break-even point for all four units.
Computer paper = 14 – 6 / 240,000
240,000 / 8 = 30,000 units needed to break-even
Napkins = 7 – 4.50 / 300,000
300,000 / 2.50 = 120,000 units needed to break-even
Place mats = 12 – 3.60 / 378,000
378,000 / 8.40 = 45,000 units needed to break-even
Poster board = 8.50 – 2.50 / 480,000
480,000 / 6 = 80,000 units needed to break-even
Margin of Safety is figured by dividing the unit contribution margin by the total contribution margin of Mendel Paper Company.
Computer Paper = 240,000 / 860,000 = 27.9%
Napkins = 300,000 / 860,000 = 34.88%
Place mats = 378,000 / 860,000 = 43.95%
Poster board = 480,000 / 860,000 = 55.81%
Break-even point for the revised estimates is as follows.
Computer paper = 14 – 7 / 245,000
245,000 / 7 = 35,000 units needed
Napkins = 7 – 4.50 / 300,000
300,000 / 2.50 = 120,000 units needed
Place mats = 12 – 4 / 360,000
360,000 / 8 = 45,000 units needed
Poster board = 8.50 – 2.50 / 480,000
480,000 / 6 = 80,000 units needed
Margin of safety for the revised estimates are as follows.
Computer paper = 245,000 / 847,000 = 28.92%
Napkins = 300,000 / 847,000 = 35.42%
Place mats = 360,000 / 847,000 = 42.5%
Poster board = 480,000 / 847,000 = 56.67% Mendel Paper Company also needed an accountant to look over the concern of the variable cost of their place mats.
Companies want to maximize their profits at all times. They have to watch all costs involved in order to maximize those profits. All four products that Mendel Paper Company produces have a variable overhead. The company is concerned about the variable overhead for the one product (place mats) because of how high it is. There is no room for profit for the place mats when the overhead is so high. There are ways for the company to lower this cost so they will have more of a profit from this product. Mendel Paper need to constantly monitor all their costs so they can find other areas that could be decreased. They also need to question each and every aspect of their business and also scrutinize each and every product they make (Fixed and variable cost control: effective cost cutting strategies, 2011). Other ways that they can get the cost down on the place mats. They are hire temporary workers or an outside company to do the work if they can do it cheaper (How to lower fixed cost to achieve financial flexibility,
2010).

References
Fixed and variable cost control: effective cost cutting strategies. (2011). Retrieved September 26, 2014, from Morebusiness.com: http://www.morebusiness.com/running_your_business/profitability/Controlling-Costs.brc
How to lower fixed cost to achieve financial flexibility. (2010, October 13). Retrieved September 26, 2014, from Smallbizviewpoints.com: http://www.smallbizviewpoints.com/2010/10/13/how-to-lower-fixed-cost-to-achieve-financial-flexibility/