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 43,000 speaker sets:

Sales	$	3,526,000
Variable costs		881,500
Fixed costs		2,310,000

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 $1,988,000. (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.

Answer 1

Solution 1:

Current income of the company = Sales revenue - Variable cost - fixed cost

= $3,526,000 - $881,500 - $2,310,000 = $334,500

Contribution margin ratio = ($3,526,000 - $881,500) / $3,526,000 = 75%

Target income = $334,500*2 = $669,000

Dollar sale needed to earn target income = (Fixed cost + Target income) /Contribution margin ratio

= ($2,310,000 + $669,000) / 75% = $3,972,000

Solution 2:

Contribution margin per unit if operation are shifted to mexico = ($3,526,000 / 43000) - $18 = $64 per unit

Fixed costs = $1,988,000

break-even point in speaker sets if operations are shifted to Mexico = Fixed costs / contribution margin per unit

= $1,988,000 / $64 = 31063 units

Solution 3:

Contribution margin per unit in united states = ($3,526,000 - $881,500) /43000 = $61.50 per unit

If management desires to achieve the Mexican break-even point and variable cost remain constant then required fixed costs = Breakeven units * Contribution margin per unit = 31063 * $61.50 = $1,910,375

Required change in fixed costs = $2,310,000 - $1,910,375 = $399,625 decrease

Solution 4:

If management desires to achieve the Mexican break-even point and fixed cost remain constant then required contribution margin per unit = $2,310,000 / 31063 = $74.37 per unit

Desired variable cost per unit = $82 - $74.37 = $7.63

Required change in variable cost per unit = ($881,500 / 43000) - $7.63 = $12.87 per unit decrease