Question

22.(12 Marks) The following monthly data are available for the LaFile Company and its only product, Product SW: Per Unit $275 110 Sales (400 units) Variable expenses Contribution margin Fixed expenses Net income Total $110,000 44.000 $ 66,000 52.800 $ 13,200 $165 4 Required: a) Without resorting to calculations, what is the total contribution margin at the break-even point? (1 Mark) b) Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs by $15. The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made? (3 Marks) c) Assume that LaFille Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels that this can be done by cutting the selling price by $25 per unit and increasing the advertising budget bal $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made? (4 Marks) d) Assume that LaFille Company is currently selling 400 units of Product SW. Management wants to automate a portion of the production process for Product SW. The new equipment would reduce direct labour costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SW, thus resulting in an increase in monthly sales of 12%. Should these changes be made? (4 Marks)

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Part 1) At the break even point, total contribution margin is equal to fixed cost So the correct answer total contribution margin at break even point = $52800 Part 2) Revised net income = (revised number of units sold * revised contribution margin)-fixed cost = (350*(165+15))-52800 = $ 10200 No, this change should not be made as net income has been reduced due to this Part 3) Revised net income = (revised number of units sold * revised contribution margin)-revised fixed cost = ((400*150%)*(165-25))-(20000+52800) = (600*140) - 72800 = $ 11200 No, this change should not be made as net income has been reduced due to this 5 Part 4) Revised net income = (revised number of units sold * revised contribution margin)-revised fixed cost = ((400*112%)*(165+20))-(10000+52800) =( 448*185)-62800 = $ 20080 Yes, these change should be made as it leads to increase in net income.