Three phone calls changed the landscape. First, she received a call from the owner of the Denver

retailer. He told Lena he was impressed with her product and made the following offer: $$If you give me

an exclusive supplier arrangement for two years, I will guarantee you a purchase volume of $4,000$ units

per month at $$26\mathrm{.}00$ per piton for the length of the contract$.$Actually$,$ I think it could be $10\%$ higher,

but I$$m only willing to guarantee $4,000.$ Her elation at the offer quickly evaporated because the $$26\mathrm{.}00$

price would not cover her current costs. She wasn$$t sure if the forge would grant her a cost break

because of the extra volume, or$,$ more importantly, if the forge had the available capacity to quadruple

production.

The second phone call was from the owner of the forge. He had decided to close the forge and retire to

Arizona. He asked if she was interested in taking over the forge. She felt her jaw drop, but quickly

recovered and said she might be interested, but would need some operating data first.

She learned that the forge had thrived making titanium implants for joint replacements, but that

business had shifted to China. In fact, the owner of the forge admitted that for the last few months Lena

had been his only customer. He operated a forge with a minimum crew of ten, each able to operate all

the equipment in the forge. Her current volume of $1,000$ units required only one week of labor. She

asked if the workers could produce more than $1,000$ units per week, and the owner speculated $$about

$1,100$ units$.$ She realized she would need all ten workers if her demand increased to $4,000$ units per

month. The forge was in operation twelve months a year but shut down periodically for vacations and

forge maintenance. Lena could count on forty$-$eight weeks of production capacity annually.

The workers were paid wages of $$65,000$ each, including benefits like holiday and vacations. Operating

costs $($fuel$,$ property taxes, insurance, maintenance, and utilities$)$ totaled $$100,000$ last year. Lena

estimated administration costs to be around $$1,000$ a month, or $$12,000$ per year. Finally, the forge

owner offered to sell the forge for $$50,000,$ IF Lena agreed to retain all ten of the forge workers at their

current salary. Lena would depreciate the forge over $10$ years using Straight Line depreciation.

The third phone call was to her father. She explained the offer to him; She would quit school to devote

$100\%$ of her time to running the business. While he had misgivings, he agreed to loan Lena the purchase

price, at $1\%$ annual interest, with the principal due in five years. He wanted to encourage Lena$$s

entrepreneurial ambitions.

Lena realized this could be a once in a lifetime opportunity. She had guaranteed demand. She would

forego a salary for at least the first year.

Registration for the Fall term is fast approaching. She must decide!

She decided to call you for an objective opinion. You understand her love for the outdoors, and she

remembered that you received an $$A$$ in ACCT $211.$ She is confident you can advise her in this matter.

$1.$ Based on the retailer$$s offer, calculate Lena$$s revenue, contribution margin and operating

income under the status quo, the retailer$$s baseline offer, and the potential $10\%$ increase.

Present the data in a Contribution format Income Statement for Elena$$s first year of operation.

$($Ignore income taxes.$)(40$ pts$)$

$($I suggest you start with unit data; then calculate the annual data.$)$

$2.$ Which costs are variable, and which costs are fixed? $(10$ pts$)$

$3.$ What is the relevant range for the forge? $(10$ pts$)$

$4.$ Is Direct Labor variable or fixed, and why? $(10$ pts$)$

$5.$ Calculate her breakeven units. $(10$ pts$)$

$6.$ Calculate her Margin of Safety in units $($for both baseline and $10\%$ increase$).(10$ pts$)$

$7.$ Is the Degree of Operating Leverage high or low? $($Explain your answer; Use the guaranteed

volume data for your calculation$).(10$ pts$)$

$8.$ What is your advice to Lena? Should she stay in school and complete her degree, or should she

throw caution to the wind and go into the rock$-$climbing equipment business? BE SURE TO

SUPPORT YOUR RECOMMENDATION WITH DATA! $($The status quo is NOT an option! The owner

is closing the forge if he does not receive an offer from Lena.$)4.$ Is Direct Labor variable or fixed, and why? $(10$ pts$)$

$5.$ Calculate her breakeven units. $(10$ pts$)$

$6.$ Calculate her Margin of Safety in units $($for both baseline and $10\%$ increase$).(10$ pts$)$

$7.$ Is the Degree of Operating Leverage high or low? $($Explain your answer; Use the guaranteed

volume data for your calculation$)$

ACCT $211$ Spring $2024$

Case: Bolzano Titanium

Contribution Income Statement

For the Year $20$xx

Status Quo:

Total Per Unit

Annual Unit Volume $12,000$ $ $30\mathrm{.}00$

Annual Revenue $ $360,000\mathrm{.}00$ $ $30\mathrm{.}00$

Variable Costs:

Direct Materials $$120,000\mathrm{.}00$ $$10\mathrm{.}00$

Contribution Margin $$240,000\mathrm{.}00$ $$20\mathrm{.}00$

Fixed Costs:

Total Costs Charged by Forge $ $240,000\mathrm{.}00$ $$20\mathrm{.}00$

Total Fixed Costs $ $240,000\mathrm{.}0020\mathrm{.}00$

Operating Income $$0\mathrm{.}00$ NA