Question

In: Accounting

Kirby Garage Doors manufactures a premium garage door. Currently, the price and cost data associated with...

Kirby Garage Doors manufactures a premium garage door. Currently, the price and cost data associated with the premium garage door are as follows:

Average selling price per premium garage door	$1,800
Average variable manufacturing cost per door	$700
Average variable selling cost per door	$200
Total annual fixed costs	$198,000

Kirby Garage Doors has undertaken several sustainability projects over the past few years. Management is currently evaluating whether to develop a comprehensive software control system for its manufacturing operations that would significantly reduce scrap and waste generated during the manufacturing process. If the company were to implement this software control system in its manufacturing operations, the use of the software control system would result in an increase of $72,000 in its annual fixed costs while the average variable manufacturing cost per door would drop by $180.

REQUIREMENTS

1. What is the company's current breakeven in units and in dollars?

2. If the company expects to sell 270 premium garage doors in the upcoming year, and it does not develop the software control systems, what is its expected operating income from premium garage doors?

3. if the software control system were to be developed and implemented, what would be the company's new breakeven point in units and in dollars?

4. If the company expects to sell 270 premium garage doors in the upcoming year, and it develops the software control system, what is its expected operating income from premium garage doors?

5. If the company expects to sell 270 premium garage doors in the upcoming year, do you think the company should implement the software control system? Why or why not? What factors should be the company consider?

Expert Solution

Requirement 1:

Current Break even point in units = Fixed costs/(Sp-VC) = 198000/(1800 - 900) = 220 units

Current Break even point in Dollars = 220 * 1800 = $ 396,000

Requirement 2:

Particulars	Amount($)
Sales(270*1800)	486000
(-) Variable manf. Cost	189000
(-) Variable Selling costs	54000
Contribution margin	243000
(-) Fixed costs	198000
Operating Income	45000

Requirement 3:

New Break even point in units = 270000/(1800-720) = 250 units

New break even point in dollars = 250 * 1800 = $ 450,000

Requirement 4:

Particulars	Amount($)
Sales(270*1800)	486000
(-) Variable manf. Cost	140400
(-) Variable Selling costs	54000
Contribution margin	291600
(-) Fixed costs	270000
Operating Income	21600

Requirement 5:

The operating Income got reduced at 270 units level if the software system is implemented than if it is not implemented.

The Quality of the products manufactured also to be considered whether to implement the software system or not.

So, the Company should not implement the software system.

ekkarill92 answered 2 years ago

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