Question

Wool Rugs​,​Inc., is considering three possible countries for the sole manufacturing site of its newest area​ rug: Italy​, France, and the United States. All area rugs are to be sold to retail outlets in the United States for $280 per unit. These retail outlets add their own markup when selling to final customers. Fixed costs and variable cost per unit​ (area rug) differ in the three countries

				Variable
	Sales Price	Annual	Variable	Marketing and
	to Retail	Fixed	Manufacturing Cost	Distribution Cost
Country	Outlets	Costs	per Area Rug	per Area Rug
Italy	$280.00	$9,394,000	$70.00	$56.00
France	280.00	5,775,000	65.00	47.00
the United States	280.00	22,050,000	70.00	63.00

Requirement 1

Compute the breakeven point for Wool Rugs Inc, in each country in (a) units sold and (b) revenues

Requirement 2

If Wool Rugs Inc plans to produce and sell 70,000 rugs in 2014, what is the budgeted operating income for each of the three manufacturing locations? comment on the results

Answer 1

Requirement -1

Italy

Break-Even Point in Units = Fixed Costs / (Price of Product - Variable Costs Per Unit)

= 9,394,000 / (280 - 126)

= 9,394,000 / 154

= 61,000 units

Break- Even point in revenue = Break-Even point in units x selling price

= 61,000 x 280

= 17,080,000

France

Break-Even Point in Units = Fixed Costs / (Price of Product - Variable Costs Per Unit)

= 5,775,000 / (280 - 109)

= 5,775,000 / 171

= 33,772 units

Break- Even point in revenue = Break-Even point in units x selling price

= 33,772 x 280

= 9,456,160

united states

Break-Even Point in Units = Fixed Costs / (Price of Product - Variable Costs Per Unit)

= 22,050,000 / (280 - 133)

= 22,050,000 / 147

= 150,000 units

Break- Even point in revenue = Break-Even point in units x selling price

= 150,000 x 280

= 42,000,000

requirement-2
budgeted operating income
Italy
particular	amount
total sale(70,000 x 280)	19,600,000
less: variable cost(70,000 x 126)	8,820,000
less: fixed cost	9,394,000
operating income	1,386,000
France
particular	amount
total sale(70,000 x 280)	19,600,000
less: variable cost(70,000 x 109)	7,630,000
less: fixed cost	5,775,000
operating income	6,195,000
united states
particular	amount
total sale(70,000 x 280)	19,600,000
less: variable cost(70,000 x 133)	9,310,000
less: fixed cost	22,050,000
operating income/ loss	-11,760,000

The company will get the higher operating income from the France outlet