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 41,000 speaker sets: Sales $ 3,280,000 Variable costs 820,000 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 $1,990,000. (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. a. If variable costs remain constant, by how much must fixed costs change? b. 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

1)

Advanced Electronics
Income statement
		Per set
Sales	$         32,80,000	$      80
Variable costs	$            8,20,000	$      20
Contribution margin	$         24,60,000	$      60
Fixed costs	$         23,10,000
Net income	$            1,50,000

Contribution margin ratio = 60 / 80 = 0.75

Desired profit = 1,50,000 * 2 = $3,00,000

Sales required to earn desired profit = (Fixed cost + Desired profit) / Contribution margin ratio

= (23,10,000 + 3,00,000) / 0.75

= $34,80,000

2)

Fixed costs = $19,90,000

Contribution margin per unit = 80 - 20 = $60

Break Even Point ( in speaker sets) = 19,90,000 / 60 = 33,167 (Approximately)

3)

(a)

In order to achieve same BEP, Fixed cost must be $19,90,000

Change required = 23,10,000 - 19,90,000 = $3,20,000

(b)

Since, Variable cost under both situations is given the same, No change is required.