You are an eager and ambitious young graduate of the Reginal F.Lewis College of Business at Virginia State University with a newAccounting degree and a great life ahead of you. One of yourclosest friends is an inventor and an entrepreneur who wants tostart a business selling a break-through new drywall screw that hehas invented and that he believes works much better than thedrywall screws currently on the market. He wants to start thebusiness by opening a factory to produce the screws which can thenbe sold to either wholesalers or retailers who will then sell themto the general public. After searching all over creation for theright sized building in the perfect location to properly meet theneeds of his target customers, he found that the ideal building inwhich to put up his factory was right here in Petersburg allalong.                                            

To begin, he was able to purchase the building he neededoutright for $525,000. Useful life of the building is 40 years andit is depreciated on a straight-line basis. Estimated salvage valueis $25,000. Property taxes on the building each year are $3,500.                                                                                                                                                                                                             

There is a new machine that another fellow VSU grad has inventedthat takes the metal for the screws and molds them into theirproper size and shape, and takes the plastic for the anchors andmolds them into their proper size and shape; an assembly line isattached to the machine where workers put the screws and anchorsinto boxes. The finished product is a box of 32 drywall screws andtheir plastic anchors that work unlike any that have come beforethem. He purchased this machine outright for $175,000. The machinehas a useful life of 25 years with no residual value and isdepreciated on a straight-line basis. The machine can produce23,000 boxes of screws and anchors per year. He is sure that he cansell every unitproduced.                                                                                                                                                                                                                                   

It is determined that to produce the 32 screws in each box willrequire 112 ounces of metal which is the only material used to makethe screws and to produce the 32 anchors in each box will take 48ounces of plastic which is the only material used to make theanchors. The metal you need is produced by multiple suppliers andyou've found one so far that will allow you to buy it at $1.50 perpound. The plastic used is also produced by multiple suppliers andyou've found one so far that will allow you to buy it at $.15 perpound. It takes 15 minutes for the workers on the assembly line tobox the screws and anchors because they are put in there in a waythat prevents them from becoming disorderly. This is part of thequality aspect of the product. Assembly line workers are paid at arate of $17.00 perhour.                                                                                                                                    

Your friend hired a Vice President (VP) who has a degree inMarketing from VSU. She did some market research and determinedthat in order to be competitive with your new product you are goingto charge $20.75 per box of screws and anchors. The Vice Presidentis paid $58,000 per year. He also hired a Chief Operating Officerwho will be paid $58,000 per year. Your friend has also asked youto serve as a consultant to his company to make sure that thebusiness gets off to a good start. Your fee has not yet beendetermined and is not part of thisproblem.               

Questions

Prepare a variable costing format income statementassuming that the company makes and sells the maximum possiblenumber of units. If the income is negative, what is the reason?Your friend asks you for advice on how to increase the companyincome. Give him at least two possible solutions to theproblem.Which solution did you recommend to your friend? Why didyou choose this particular solution?

Prepare a memo addressed to your friend/clientexplaining your options and your recommendation. This memo shouldbe no more than one page long.              

What is the new break-even point after implementing yoursolution?

What is the maximum income the company can make afterimplementing your solution? Is this enough profit to justify goinginto business? Why or whynot?                                                                                                     

Prepare both an absorption costing income statement anda variable costing income statement to reflect your solution. Stateyour assumptions about the number of units produced and the numbersold.