Question

In: Accounting

Magic Inc. sells a single product at a selling price of $57 per unit. Magic’s variable...

Magic Inc. sells a single product at a selling price of $57 per unit. Magic’s variable costs are $35 per unit and its total fixed costs are $719,400 per year. Magic is considering the purchase of new equipment which would reduce its variable costs to $28 per unit but increase its total fixed costs to

$1,023,700 per year.

a. Assuming Magic expects to sell 40,000 units per year, should it purchase the new equipment?

b. Would your answer change if Magic expects to sell 50,000 units per year?

Solutions

Expert Solution

Assuming Magic expects to sell 40,000 units per year

Increase(Decrease) in net operating income = Increase in total comtribution - increase in total fixed cost

= $ 2,80,000 - $ 3,04,300

= ( $ 24,300 )

Magic Inc should not purchase new equipment as it is resulting in decrease in net operating income by $ 24,300

Working Note:

Increase in total comtribution = Total revised contribution - Total Contribution at current

= $ 11,60,000 - $ 8,80,000

= $ 2,80,000

Increase in total fixed cost = Total revised fixed cost - Total current fixed cost

= $ 10,23,700 - $ 7,19,400

= $ 3,04,300

Total Contribution at current= Contribution per unit * expected number of units sold

= ($57-$35) * 40,000

= $22 * 40,000

= $ 8,80,000

Total revised contribution = Revised Contribution per unit * expected number of units sold

= ( $57- $28) * 40,000

= $29 * 40,000

= $ 11,60,000

Assuming Magic expects to sell 50,000 units per year

Increase(Decrease) in net operating income = Increase in total comtribution - increase in total fixed cost

= $ 3,50,000 - $ 3,04,300

= $ 45,700

Magic Inc should purchase new equipment as it is resulting in increase in net operating income by $ 45,700

Working Note:

Increase in total comtribution = Total revised contribution - Total Contribution at current

= $ 14,50,000 - $ 11,00,000

= $ 3,50,000

Increase in total fixed cost = Total revised fixed cost - Total current fixed cost

= $ 10,23,700 - $ 7,19,400

= $ 3,04,300

Total Contribution at current= Contribution per unit * expected number of units sold

= ($57-$35) * 50,000

= $22 * 50,000

= $ 11,00,000

Total revised contribution = Revised Contribution per unit * expected number of units sold

= ( $57- $28) * 50,000

= $29 * 50,000

= $ 14,50,000

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

Norman Corporation produces and sells a single product. The unit selling price is $150 and variable...

Norman Corporation produces and sells a single product. The unit selling price is $150 and variable expense per unit is $42. Total fixed expenses are $421,200. Enter answers using whole dollar amounts, no commas or dollar signs or decimals. Determine the unit sales needed to earn a target profit of $21,600. ? Determine the dollar sales needed to earn a target profit of $54,000 ? Calculate the margin of safety in dollars for each target profit amount above ? If...

Sandler Company sells a single product. The product has a selling price of $40 per unit...

Sandler Company sells a single product. The product has a selling price of $40 per unit and variable expenses of $15 per unit. The company's fixed expenses total $30,000 per year. The company's break-even point in terms of total dollar sales is: Select one: a. $100,000. b. $80,000. c. $60,000. d. $48,000

Monterey Co. makes and sells a single product. The current selling price is $18 per unit....

Monterey Co. makes and sells a single product. The current selling price is $18 per unit. Variable expenses are $10.8 per unit, and fixed expenses total $39,080 per month. (Unless otherwise stated, consider each requirement separately.) Calculate the break-even point expressed in terms of total sales dollars and sales volume. (Do not round intermediate calculations.) Break-even sales Break-even volume units b. Calculate the margin of safety and the margin of safety ratio. Assume current sales are $115,700. (Do not round...

Riveria Co. makes and sells a single product. The current selling price is $38 per unit....

Riveria Co. makes and sells a single product. The current selling price is $38 per unit. Variable expenses are $19 per unit, and fixed expenses total $37,000 per month. Sales volume for May totaled 4,760 units. Required: Calculate operating income for May. Calculate the breakeven point in terms of units sold and total revenues. Management is considering installing automated equipment to reduce direct labor cost. If this were done, variable expenses would drop to $13 per unit, but fixed expenses...

2. Liest Corporation produces and sells a single product whose selling price is $112.00 per unit...

2. Liest Corporation produces and sells a single product whose selling price is $112.00 per unit and whose variable expense is $58.00 per unit. The company's monthly fixed expense is $249,480. Required: Compute break even sales in units and in dollars for Liest (4 points). Break even in UNITS = _________________ Break even in Sales $ = _________________ b. Compute how many units and dollars Liest will have to sell in order to make a target net...

Adams Company sells a single product. The product sells for $100 per unit. The company’s variable...

Adams Company sells a single product. The product sells for $100 per unit. The company’s variable expenses are 80% of sales and its fixed expenses total $150,000 per year. a: What is the company’s contribution margin ratio? b: What is the company’s break-even point? (Give answer in dollars and in units.)

Zumpano inc. produces and sells a single product. The selling price of the product is $170.00...

Zumpano inc. produces and sells a single product. The selling price of the product is $170.00 per unit and its variable cost is $73.10 per unit. The fixed expenses is $125,001 per month The break-even in monthly dollar sales is closest to:

Narchie sells a single product for $90. Variable costs are 60% of the selling price, and...

Narchie sells a single product for $90. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $630,000. Current sales total 15,000 units. 1.) Narchie: a.) will break-even by selling 17,500 units. b.) will break-even by selling 5,500 units. c.) cannot break-even because it loses money on every unit sold. d.) will break-even by selling 10,833 units. e.) will break-even by selling 997,500 units. 2.) In order to produce a target profit of...

Q 2?Rafique Inc. makes product A and sells at selling price of SAR 45 per unit....

Q 2?Rafique Inc. makes product A and sells at selling price of SAR 45 per unit. Badr Inc. wants to buy 5,000 units at SAR 27 per unit. Rafique Inc. has a normal capacity of 101,000 units and projected sales to regular customers this year is 92,000 units. Per unit costs traceable to the product (based on normal capacity of 92,000 units) are listed below? Direct Materials??8.1 Direct Labour?`??6.0 Variable Mfg. Overhead?6.2 Fixed mfg. overhead??4.8 Fixed administrative costs?0.8 Fixed Selling...

Q 2?Rafique Inc. makes product A and sells at selling price of SAR 45 per unit....

Subjects