Question

Martin Corporation sells component parts for the electronics industry. Martin Corporation currently sells 160,000 units per year at a price of $6.50 per unit; its variable cost is $4.00 per unit; and fixed costs are $350,000 for the year. Martin is considering expanding into two additional states, which would increase its fixed costs to $570,000 and would increase its variable unit cost to an average of $4.24 per unit. If Martin expands, it expects to sell 250,000 units at $7.10 per unit.

1. How much operating profit (EBIT) is Martin Corporation currently realizing, with a sales volume of 160,000 units per year?

a. What is Martin Corporation’s current breakeven point in terms of:

1. Quantity:

2. Sales Dollars:

2. How much operating profit (EBIT) would Martin Corporation realize under the expansion proposal?

a. What would be Martin’s new breakeven point in terms of:

1. Quantity:

2. Sales dollars:

3. Based on the above analysis, what recommendation would you make to Martin Corporation with regard to their proposed expansion plan?

Answer 1

1. calculation of EBIT

Sales per unit = 6.50

Less : Varaible costs per unit = 4.00

Contribution per unit = 6.50-4.00 = 2.50

Total contribution = 2.50 * 160000 = 400000

Less : Fixed cost = 350000

Therefore, EBIT = 400000-350000 = 50000

a. BEP in sales is the point where Fixed cost = Total sales = 350000.

BEP in quantity = BEP in sales / Selling price per unit = 350000 / 6.50 = 53,846.154 units.

2. Expansion plan :

Calculation of EBIT

Total sales : = (6.50*160000) + (250000*7.10) = 2815000

Less : Variable cost = 410000*4.24 = 1738400

Contribution = 1076600

Contribution per unit = 1076600 / 410000 = 2.6258

Less : Fixed cost = 570000

EBIT = 506600

New BEP in sales dollars =New Fixed Cost = 506600

New BEP in quantity = Fixed cost / Contribution per unit = 506600 / 2.6258 = 192931.68 units.

3. I would recommend Martin corporation to take up the proposed expansion plan for the reason that after expansion, the contribution per unit has increased from 2.50 to 2.6258.