Question

Houston-based Advanced Electronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 42,000 speaker sets:

Sales	$	3,444,000
Variable costs		861,000
Fixed costs		2,250,000

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $18.00 per set; annual fixed costs are anticipated to be $1,986,000. (In the following requirements, ignore income taxes.)

Required:

1. Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States.
2. Determine the break-even point in speaker sets if operations are shifted to Mexico.
3. Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.

1. If variable costs remain constant, by how much must fixed costs change?
2. If fixed costs remain constant, by how much must unit variable cost change?

4. Determine the impact (increase, decrease, or no effect) of the following operating changes.

Req.1

Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States. (Do not round intermediate calculations and round your final answers to nearest whole dollar.)

	Current income Required dollar sales

Req. 2

Determine the break-even point in speaker sets if operations are shifted to Mexico. (Do not round intermediate calculationsand round your final answer up to nearest whole number.)

	Break-even point units

Req. 3

Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.

a. If variable costs remain constant, by how much must fixed costs change? (Round your intermediate unit calculations to the nearest whole number and round your final answers to the nearest whole dollar.)

b. If fixed costs remain constant, by how much must unit variable cost change? (Round your intermediate unit calculations to the nearest whole number and round your final answer to 2 decimal places.)

	a. Fixed costs by b. Variable costs by per unit

Req. 4

Determine the impact (increase, decrease, or no effect) of the following operating changes.

	a. Effect of an increase in direct material costs on the break-even point. b. Effect of an increase in fixed administrative costs on the unit contribution margin. c. Effect of an increase in the unit contribution margin on net income. d. Effect of a decrease in the number of units sold on the break-even point.

Answer 1

1	Calculation of the company Current Income
		Amount	Units	Per Unit
	Sales	$3,444,000	42000	$82
	Variable Costs	$861,000	42000	$20.50
	Contribution Margin	$2,583,000
	Fixed Costs	$2,250,000
	Net Income	$333,000
	Now Income Increase	333000*2	$666,000
	Contribution Margin	2583000/42000	$61.50
	Current Sale Price	$3444000/42000	$82
	Sales Volume Needed	($666000+$2250000)/$61.5	47415
	Dollar value of sales			$82*47415
				$3,888,030
2	Determination of break even point in speakers if operation is shifted to Mexico
	Mexico
	Variable Cost	$18
	Fixed Costs	$1,986,000
	Contribution Margin	(3444000-756000)/42000=$64
	Break Even	31031
3 a	Therefore if the management wants to achieve the Mexican Break Even Point in
	the US we can to determine the change in fixed cost with variable cost remaining constant
	31031	Fixed Expenses/Unit Contribution Margin
	Therefore Fixed Expenses	31031*61.5
		$1,908,406.50
	The fixed Expenses should be decreased from $2205000-$1908406.5	$296,593.50
b	Change in Variable Cost
	The equation to calculate the change in VC /unit required to achieve the Mexican
	break even ie earn profit of zero
	unit sales price *break even sales vol-unit VC exp *break even sales vol-Fixed Exp=zero
	$82*31031-X*31031-1908406.5=0
	$2544542-31031X-1908406.5=0
	636135.5	31031X
	X	20.5
	Therefore the variable expense /unit required to achieve Mexican break even		20.5
	Here the effect of change in VC is no effect ie 20.5 in both the cases
4a	Effect of an increase in direct material costs on break even point
	When the direct material cost increase the contribution margin increase and thus the break even point increase
	as contribution margin and break even point are inversely proportional
b	Effect of an increase in fixed adminstrative cost on break even point
	When fixed cost increase the break even point also increases as fixed costs and break even point
	are directly proportional
c	Effect of an increase in unit contribution margin on break even point
	When unit contribution margin increase the break even point decreases as unit contribution margin
	and break even point are inversely propotional
d	Effect of an decrease in number of units sold on break even point
	The no of units sold does not have any impact on the break even point since the break even
	point depends upon the fixed expenses and unit contribution margin and break even point
	does not depend upon no of units sold