Question

Sales (13,000 units × $20 per unit) $ 260,000

Variable expenses 130,000

Contribution margin 130,000

Fixed expenses 145,000

Net operating loss $ (15,000)

1 Refer to the original data. By automating, the company could reduce variable expenses $3 per unit . However, fixed expenses would increase by $52,000 each month.

a. Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. (Use the CM ratio to calculate your break-even point in dollars. Round your final answers to the nearest whole number.)

b Assume that the company expects to sell 20,200 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

c. would you recommend that company automates their operations ( assuming that compani expect to sell 20,200)

Answer 1

Answer:

OLD DATA:

Sales per Unit = Selling price / no. of unit
Sales per unit = $260,000 / 13,000
Sales per unit = $20 per unit

Variable expenses per unit = Variable expenses / no. of unit
Variable Expenses per Unit = $130,000 / 13,000
Variable Expenses per unit = $10 per unit

Contribution Margin per unit = Contribution Margin / no. of Unit
Contribution margin per unit = $130,000 / 13,000
Contribution margin per unit = $10

NEW DATA:

Selling price per unit = $20
Variable Expenses per unit = Old Variable expenses –reduced price
Variable Expenses per unit = $10 - $3
Variable Expenses per unit = $7

Fixed Expenses = Old Fixed Expenses + Increased Expenses
Fixed Expenses = $145,000 + $52,000
Fixed Expenses = $197,000

Contribution Margin = Selling Price – Variable Expenses
Contribution Margin per unit = $20 - $7
Contribution Margin per unit = $13

Answer of Part a:

CM Ratio = Contribution margin per unit / Selling price per unit *100
CM Ratio = $13 / $20 *100
CM Ratio = 65%

Break Even Point in Units = Fixed Expense / Contribution Margin per Unit
Break Even Point in Units = $197,000 / $13
Break Even point In Units = 15,154

Break Even Point in Dollars = 15,154 * $20
Break Even Point in Dollars = $303,080

Answer of Part C:

It is depend on how much company is willing to take the risk as well as future prospects for future sales. Therefore the proposed changes would increase the Company’s break even point as well as their fixed costs           . This changes also increases the CM ratio. The higher CM ratio means that once break even point is reached, profits will more rapidly increase than at present.