La Mesa Manufactures Unpainted Furniture For Do It Yourself

La Mesa Manufactures Unpainted Furniture For The Do It Yourself Diy

La Mesa manufactures unpainted furniture targeted at the DIY market, currently selling a table for $69. The production costs for the unpainted table include $38 variable costs and $15 fixed costs. The company is contemplating offering a stained and sealed version of the table at a selling price of $105. The finishing process would incur additional variable costs of $19 per table and fixed costs of $2. The core decision involves analyzing whether the company should continue selling unpainted tables or switch to selling the finished version. This requires assessing the financial implications through a detailed contribution margin analysis to determine which option maximizes profitability.

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To analyze whether La Mesa should continue selling unpainted tables or transition to finished, stained tables, we must compare the contribution margins and fixed costs involved in each scenario. This analysis hinges on understanding the incremental revenues and costs associated with finishing the tables and determining which option yields higher net income.

Current Product Analysis – Unpainted Tables

At present, La Mesa sells unpainted tables for $69. The variable costs per unit amount to $38, and the fixed costs are $15. It is important to note that fixed costs are generally considered sunk in decision-making unless they are directly attributable to that specific product line and will change with the decision. The contribution margin per unpainted table can be calculated as:

• Sales price per unit: $69
• Variable costs per unit: $38
• Contribution margin per unit: $69 - $38 = $31

Fixed costs of $15 are associated with the current production but do not directly influence the decision between unpainted and finished tables unless these costs would change based on the decision.

Proposed Finished Product Analysis – Stained and Sealed Tables

If La Mesa decides to offer a stained and sealed version of the table, the selling price increases to $105. The variable costs for finishing are $19 per unit, and fixed costs related to finishing are expected to be only $2 per unit. The total variable costs per finished table include the original $38 (unpainted costs) plus $19 (finishing costs), totaling $57. The total fixed costs associated with finishing are comparatively minimal at $2, but these are fixed per unit costs, representing additional fixed cost investments for the finishing process.

The contribution margin per finished table is then calculated as:

• Sales price: $105
• Variable costs (original + finishing): $38 + $19 = $57
• Contribution margin per unit: $105 - $57 = $48

Next, we consider the fixed costs associated with finishing, which are $2 per unit. The net contribution margin after accounting for fixed costs is:

• Net contribution margin per finished table: $48 - $2 = $46

In this context, fixed costs of $2 are incremental and directly attributable to each finished product, thus reducing the contribution margin accordingly.

Comparison and Decision Analysis

To determine which product line maximizes profitability, compare the contribution margins per unit:

• Unpainted: $31
• Finished: $46

The difference indicates that finishing and sealing the table increases the contribution margin per unit by:

$46 - $31 = $15

Additionally, selling the finished table at $105 yields a significant increase in revenue per unit, which, combined with the higher contribution margin, suggests that the finished table is more profitable on a per-unit basis.

However, to fully assess the decision, La Mesa should also examine the potential overall impact considering sales volume. If the demand for finished tables is sufficient to match or exceed current sales, switching to the finished product line would lead to increased net income. Conversely, if market demand is uncertain or capacity constraints exist, the current unpainted product might remain preferable.

Additional Considerations

Beyond pure contribution margin analysis, La Mesa should consider factors such as customer preferences, brand positioning, production capacity, and potential effects on the existing supply chain. If the finished tables require significant new investments or retooling, these costs should be factored into the decision. Moreover, market research to gauge customer willingness to pay $105 for the finished table versus the $69 unpainted version is critical in making a comprehensive decision.

Conclusion

Based on the contribution margin analysis alone, producing and selling finished tables at $105 with $19 variable finishing costs and $2 fixed finishing costs generates a higher contribution margin per unit ($46) than continuing with unpainted tables ($31). Therefore, if demand for the finished product exists and production capacity allows, La Mesa should shift its focus toward selling the finished stained and sealed tables to maximize profitability.

Implementing this decision involves understanding the broader strategic, operational, and market implications, but from a purely financial perspective, the finished option is superior given the calculations performed.

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