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 44,000 speaker sets:

Sales $ 3,608,000

Variable costs 902,000

Fixed costs 2,250,000

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $16.00 per set; annual fixed costs are anticipated to be $1,988,000. (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

Part 1 – Current Income

Sales Revenue	$3,608,000
Less: Variable Costs	($902,000)
Contribution Margin	$2,706,000
Less: Fixed Costs	($2,250,000)
Current Income	$456,000

Dollar sales needed to double current income

Contribution Margin Ratio = Contribution $2,706,000 / Sales $3,608,000 x 100

= 75%

Dollar Sales needed to double current income = Fixed Costs $2,250,000 / Contribution Margin Ratio 0.75

= $3,000,000

Part 2 – Break even point if operations are shifted to Mexico

We need to first calculate the Contribution Margin per unit to find out break even point in speaker set.

Unit Selling Price = $3,608,000 / 44,000 Units = $82

Variable Cost per unit = $16

Contribution Margin Per Unit = Unit Selling Price $82 – Unit Variable Cost 16 = $66

Break Even Point in Speaker Set = Total Fixed Cost $1,988,000 / Unit Contribution Margin $66

= 30,121 sets

Part 3(a) – If variable costs remain constant, by how much must fixed costs change

Sales Revenue (Break Even Point 30,121 * $82)	$2,469,922
Less: Variable Costs (30,121*$20.50)	$617,481
Contribution Margin	$1,852,441

Change in Fixed Costs = Existing Fixed Cost $2,250,000 - New Contribution Margin $1,852,441

= $397,559 Decrease

Part 3(b) - If fixed costs remain constant, by how much must unit variable cost change

Fixed Costs = $2,250,000

We need $2,250,000 Contribution Margin to achieve break even point 30,121 Units

Variable Cost Per Unit = (Total Sales $2,469,922 – Contribution Margin $2,250,000) / 30,121 Break Even Point

=$7.30

Change in Unit variable cost = $20.50 - $7.30 = $13.20 per unit decrease

Part 4 – Please provide information to answer this part

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you