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	$	3,520,000
Variable costs		880,000
Fixed costs		2,310,000

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $20.00 per set; annual fixed costs are anticipated to be $1,986,000. (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.

1. If variable costs remain constant, by how much must fixed costs change?
2. 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

		Total	PU
Req 1	Sales	3,520,000	80.00
	Less: Variable Costs	880,000	20.00
	Contribution Margin	2,640,000	60.00
	Less: Fixed Cost	2,310,000
	Net Income	330,000
	Contribution Margin Ratio	75.00%	(60/80)
	Target income(Double)	660,000
	Add: Fixed Cost	2,310,000
	Required Contribution margin	2,970,000
	Contribution Margin Ratio	75.00%
	Required Dollars Sales	3,960,000
Req 2	Sales	80.00
	Less: Variable Costs	20.00
	Contribution Margin	60.00
	Contribution Margin Ratio	75.00%
	Fixed Cost	1,986,000
	Contribution Margin Ratio	75.00%
	Required Dollars Sales-Break Even	2,648,000
Req 3	Contribution Margin At Mexican Point	1,986,000	(2648000*75%)
	Less: Fixed Cost at USA	2,310,000
	Fixed Cost must Reduce by	-           324,000
Req 4	Sales at Break Even Point	2,648,000	(2648000*75%)
	Less: Required Contribution-Fixed Cost	2,310,000
	Balance is Variable Cost	338,000
	PU Variable Cost	33,100
	Variable Cost Revised	10.21
	Existing PU VC	20.00
	Reduction Required	9.79
Req 5		USA	Mexico
	Sales	3,520,000	3,520,000
	Less: Variable Costs	880,000	880,000
	Contribution Margin	2,640,000	2,640,000
	Less: Fixed Cost	2,310,000	1,986,000
	Net Income	330,000	654,000
	Increase in Net Income	324,000