Question 1. Doug Dugan owns and operates Doug’s Dog Houses, a successful small business that produces and sells

dog houses to customers across the Great Plains region of North America. Each dog house sells for $200. The unit variable costs to produce each standard dog house are $80, and the annual fixed costs for the operation total $18,000.

Part A. How many dog houses must Doug’s business sell each year in order to break even?

Part B. How much in terms of annual sales revenue (dollars) must Doug’s business sell in order to break even?

Question 2. Referring back to Question 1 above, Doug’s Dog Houses just received a special order from Kenny’s Kennels for 1,000 specially insulated and carpeted dog houses offered at a selling price of $250 each. Doug, the owner of Doug’s Dog Houses, believes that along with his normal business volume for standard dog houses he can probably fill this special order through a bulk purchase of some additional building materials and by hiring some temporary part-time labor in the production area. In other words, with some added variable costs, Doug is sure he has enough capacity in his operation to accept the special order without impacting his regular business volume. To help him ultimately decide whether or not to accept the special order of premium insulated dog houses requested by Kenny’s Kennels, Doug listed the following detailed breakdown of the unit costs associated with this product: direct materials, $40; direct labor, $50; variable manufacturing overhead, $20; fixed manufacturing overhead, $10.
Part A. List the relevant costs per unit for Doug’s decision as to whether or not to accept the special order. (Hint: be careful…just because a value is listed does not necessarily mean it’s relevant to this decision.)

Part B. What would be the change in net income if Doug decides to accept the special order from Kenny’s Kennels?

Part C. Considering the analysis above, should Doug’s Dog Houses accept the special order from Kenny’s Kennels? Why or why not?

 Cameron’s Camera Company manufactures two product lines: cameras and video recorders. The company’s segment income statement below shows how revenues and expenses are broken out between the two product lines.

CamerasVideo RecordersTotal
Sales revenue$300,000$100,000$400,000
Cost of goods sold
Variable$75,000$49,000$124,000
Fixed$82,000$28,000 $110,000
Total cost of goods sold$157,000 $77,000 $234,000
Gross profit$143,000$23,000 $166,000
Marketing and administrative expenses
Variable$25,000$28,000$53,000
Fixed$32,000 $19,000$51,000
Total marketing and administrative expenses$57,000 $47,000$104,000
Net income (loss)$86,000 $(24,000)$62,000

Cameron’s management is considering discontinuing the video recorder product line and will need to complete an analysis to determine if this really makes good business sense. While in many cases dropping a product line will have no impact on a company’s fixed costs, in this specific situation the company’s accountants estimated that discontinuing the video recorder line will enable some savings that will decrease the fixed cost of goods sold by $10,000 and also decrease the fixed marketing and administrative expenses by $4,000.

For this problem, you will need to complete the incremental analysis below supporting the decision as to whether or not the video recorder product line should be discontinued. Note that there are various ways we can approach this analysis and reach the same conclusion. One method would be to draft an income statement with the video recorders included (we already have this completed) and also draft a separate income statement with the video recorders removed from the company. We could then compare the bottom-line net income of the two statements to see which alternative produces a higher total net income. However, to establish a common approach for everyone, we’ll apply another efficient and logical method by simply listing each relevant revenue and expense factor – these are the items that would change if the video recorder product line were eliminated – and we’ll note the dollar amount of the changes that would occur. The framework for this analysis has been set up for you below where we’ve already listed only the relevant factors (i.e., the factors that would change if the video recorder line is dropped). You need to complete the incremental analysis by reviewing the given problem data above, carefully looking at the listing below, and then inserting the appropriate dollar amounts into each individual “answer box.” In addition to inserting the dollar amounts, also be very careful to properly specify whether each amount would positive or negative…this makes a big difference!

Relevant factor if video recorder line is discontinued:Insert change in $:
Lost sales revenue from video recorders:
Savings in video recorder variable COGS:
Savings due to decreased fixed COGS:
Savings in video recorder variable marketing & admin costs:
Savings due to decreased fixed marketing & admin costs:
Net income difference (calculated from above values):

Finally, looking at the numerical result of your incremental analysis above…

YesNo
Should the company discontinue the video recorder product line? Place an “X” in either the “Yes” or “No” box.

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