Question

Killington 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 $ 30 comma 000 in its annual fixed costs while the average variable manufacturing cost per door would drop by $ 150.

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

2.  If the company expects to sell 320 premium garage doors in the upcoming? year, and it does not develop the software control? system, 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? break-even point in units and in? dollars?

4. . If the company expects to sell 320 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 320 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 the company? consider?

Data:

Average selling price per premium garage door	$3,000
Average variable manufacturing cost per door	$540
Average variable selling cost per door	$210
Total annual fixed costs	$270,000

Answer 1

(1). Current breakeven in units and in? dollars;

Break-even in units = Fixed costs / (Sale price – Variable cost)

Break-even in units = $270000 / ($3000 – $750)

Break-even in units = $270000 / $2250

= 120 Units

Break-even in dollars = Break-even in units * Sale price per unit

Break-even in units = 120

Sale price per unit = $3000

Thus, Break-even in dollars (120 * $3000) = $360000

(2). Expected operating income = $450000

Explanation;

Sale (320 * $3000)	$960000
Less: Variable costs (320 * 750)	($240000)
Contribution margin (320 * $2250)	$720000
Less: Fixed costs	($270000)
Expected operating income	$450000

(3). Company's new? break-even point in units and in? dollars;

Break-even in units = Fixed costs / (Sale price – Variable cost)

New fixed costs ($270000 + $30000) = $300000

New variable costs ($750 - $150) = $600

Break-even in units = $300000 / ($3000 – $600)

Break-even in units = $300000 / $2400

= 125 Units

Break-even in dollars = Break-even in units * Sale price per unit

Break-even in units = 125

Sale price per unit = $3000

Thus, Break-even in dollars (125 * $3000) = $375000

(4). Expected operating income = $468000

Explanation;

Sale (320 * $3000)	$960000
Less: Variable costs (320 * 600)	($192000)
Contribution margin (320 * $2400)	$768000
Less: Fixed costs	($300000)
Expected operating income	$468000

(5).

Yes, company should implement new implement the software control? system if company is able to sell more units because as we have seen that at the level of sale of 320 units net operating income is higher in case of new software control? system.

But company should also keep in mind that in case of implementation of software control? system break-even point is higher, so in case of lower sale company may suffer with operating losses due to higher break-even point.

Overall we can say that at current level of sale 320 units, new software control system is more profitable but due to higher break-even point there is higher risk of operating losses if sales fall. So company should keep this point in mind while formulating policies.