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 Variable costs Fixed costs : $3,600,000 902,000 2,310,000 Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $18.00 per set; annual fixed costs are anticipated to be $1,988,000. (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. a. If variable costs remain constant, by how much must fixed costs change? b. 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 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. (Do not round Intermediate calculations and round your final answers to nearest whole dollar.) Current income Required dollar sales

Answer 1

Solution: 1 Current income: Profit = Total Sales - Fixed Costs - Variable Cost Profit = $3,608,000 - $2,310,000 - $902,000 Profit = $396,000. 2 At Breakeven point: Profit = 0 Total Sales - variable cost-fixed cost = 0 $82X - $18X - $1,988,000 = 0 $64X = $1,988,000 X = 31,062.50 speaker sets Required dollar sales: Cost per set = Variable Costs/Total number of sets Cost per set = $902,000 / 44,000 Cost per set = $20.50 a At Breakeven point: Profit = 0 Total Sales - variable cost-fixed cost = 0 $82x31,062.50 - $20.50x31,062.50 - fixed cost. = 0 $2,547,125 - $636,781.25 - fixed cost = 0 Fixed cost = $1,910,343.75 Price per set = Total Sales/Total number of sets Price per set = $3,608,000/44,000 Price per set = $82.00 Total Sales = Profit + Fixed Costs + Variable Costs let the total sales = X $82X = 2x($396,000) + $2,310,000 + 20.50X $82X = $792,000+ $2,310,000+ 20.50X $82X = $3,102,000 + 20.50X $61.5X = $3,102,000 X = $3,102,000/ 61.5 X = 50,439 speaker sets b At Breakeven point: Profit = 0 Total Sales - variable cost-fixed cost = 0 $82x31,062.50 - XX31,062.50 - $ 2,310,000. = 0 $2,547,125 - $2,310,000 - XX31,062.50 = 0 $237,125 - XX31,062.50 = 0 X = $237,125 / 31,062.50 X = $7.63 So the required total sales is = Price per set x Total number of sets Total sales = $82 x 50,439 Total sales = $4,136,000 4 Determination of Impact: a) Increase b) No effect c) Increase d) No effect