Question

Rosario Company, which is located in Buenos Aires, Argentina, manufactures a component used in farm machinery. The firm's fixed costs are 3,100,000 p per year. The variable cost of each component is 1.200 p. and the components are sold for 3,000 peach. The company sold 5,700 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 2.500 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? (9) de maround yoOOP WW, 1. Break-even point 1,722 components 2. New break-even point 2 ,067 components 3. Not Income 4. New break-even point components 5. Should the price change discussed in requirement (4) be made? Yes, since the projected net income will increase

Answer 1

SOLUTION

1. Break even point = Fixed Cost / Contribution per unit

= 3,100,000 / (3,000 - 1,200)

= 3,100,000 / 1,800

= 1,722

2. Revised fixed cost = 3,100,000 * 120% = 3,720,000

Break even point = Fixed Cost / Contribution per unit

= 3,720,000 / (3,000 - 1,200)

= 3,720,000 / 1,800

= 2,067

3. Net income = Sales - Variable cost - Fixed Cost

= (3,000 * 5,700) - (1,200 * 5,700) - 3,100,000

= 17,100,000 - 6,840,000 - 3,100,000

= 7,160,000

4. New contribution margin = 2,500 - 1,200 = 1,300

Break even point = Fixed Cost / Contribution per unit

= 3,100,000 / 1,300 = 2,385

5. Net income after reducing sale price = (1,300*6,600) - 3,100,000

= 8,580,000 - 3,100,000 = 5,480,000

Since net income has been reduced , therefore it is not advised to reduce selling price to 2,500