Question

In: Accounting

Rosario Company, which is located in Buenos Aires, Argentina, manufactures a component used in farm machinery....

Rosario Company, which is located in Buenos Aires, Argentina, manufactures a component used in farm machinery. The firm’s fixed costs are 3,900,000 p per year. The variable cost of each component is 1,700 p, and the components are sold for 3,200 p each. The company sold 6,000 components during the prior year. (p denotes the peso, Argentina’s national currency. Several countries use the peso as their monetary unit. On the day this exercise was written, Argentina’s peso was worth 0.104 U.S. dollar. In the following requirements, ignore income taxes.)

Required:  

  1. Compute the break-even point in units.

  2. What will the new break-even point be if fixed costs increase by 20 percent?

  3. What was the company’s net income for the prior year?

  4. The sales manager believes that a reduction in the sales price to 2,700 p will result in orders for 900 more components each year. What will the break-even point be if the price is changed? (Round your answer to the nearest whole number.)

  5. Should the price change discussed in requirement (4) be made?

1. Break-even point components
2. New break-even point components
3. Net income p
4. New break-even point components
5. Should the price change discussed in requirement (4) be made?

Solutions

Expert Solution

Marginal costing is a technique of costing where fixed cost is deducted from the contribution and variable cost is charged to direct product to product.

Note all the calculations are in P(peso) question has not asked to calculate in U.S dollar

1) BEP(units) is calculated as follows.

BEP( unit) is 2600 units

Calculation of 2600 BEP(Units)

2) New BEP(units)if fixed cost increased by 20%

New BEP(units) is 3120 units.

The calculation for 3120 BEP units contribution per unit will remain same as in (1) above.P1500

3) Net income of the prior year

Note in question nowhere is given that increased fixed has to be taken for calculating prior year's profit, so it calculated at a fixed cost without a 20% increase.

Calculation of net income of the prior year

4) New BEP(units) for the sales price P 2700 per unit

New BEP(units) is 3900 units

The calculation for new BEP 3900 units

5) The price change should not be made as it is evident from the 4) above calculation profit comes to P 30,000,00 whereas in the (3) Prior net incomes is  P 51,00,000 without a change in the price of unit.so pice need not be changed of the product.


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