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 40,000 speaker sets:

Sales	$	3,360,000
Variable costs		840,000
Fixed costs		2,310,000

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $20.00 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	sales	3360000
	variable cost	840000
	contribution margin	2520000
	fixed cost	2310000
	current net income	210000
	sales per unit	3360000/40000
		84
	contribution per unit	2520000/40000
		63
	Required sales Unit	(2310000+420000)/63
		43333
	Required Sales in Dollars	3639972
2	Break-even point Units	1986000/(84-20)
		31031
3.a	Required Fixed Expense	Break-even Units * Contribution
		31031*63
		1954953
	Actual Fixed Expense	2310000
	Required Fixed Expense	1954953
	Fixed Expense to be reduced	355047
3.b	Required Variable Expense	Sales Price - (Fixed Cost/Break-even Units)
		84-(2310000/31031)
		9.56 per unit
	Variable Expense to be reduced	21-9.56
		11.44 per unit
4a	Break-even point increases
4b	No Change
4c	Net Income will increase in Unit contribution margin
4d	No Change