Question

Riveria Co. makes and sells a single product. The current selling price is $39 per unit. Variable expenses are $17 per unit, and fixed expenses total $39,500 per month. Sales volume for May totaled 4,550 units. Required: a. Calculate operating income for May. b. Calculate the break-even point in terms of units sold and total revenues. (Round your intermediate calculations to the nearest whole dollar.) c. Management is considering installing automated equipment to reduce direct labor cost. If this were done, variable expenses would drop to $11 per unit, but fixed expenses would increase to $64,100 per month. c-1. Calculate operating income at a volume of 4,550 units per month with the new cost structure. c-2. Calculate the break-even point in units with the new cost structure. c-3. Why would you suggest that management seriously consider investing in the automated equipment and accept the new cost structure? As sales volume moves above the break-even point, contribution margin and operating income will? By a relatively greater amount than under the old cost structure.

Answer 1

	Without Machinery Per Unit	Without Machinery	With Machinery Per Unit	With Machinery	Increase In Sales Volume above Breakeven Point
Units Sold		4550		4550	2290
Sales	39	177450	39	177450	89310
Variable Cost	17	77350	11	50050	25190
Contribution	22	100100	28	127400	64120
Fixed Costs		39500		64100	64100
Profit	13.32	60600	13.91	63300	20
Breakeven Point (Fixed Costs / Contribution Per Unit) (Units)		1795		2289

When the management will install the machinery, the fixed costs will go up and hence the breakeven units will also increase. As seen above, by installing new machinery Breakeven point raised from 1795 units to 2289 units.

When the volume of sales moves above the breakeven point the contribution margin and Operating profit will go up.

Increase in Contribution Margin

Operating Profit will become Positive