Question

Our team is hired by Apple to help assess whether or not to continue to manufacture and sell an older model of the iPhone. Apple explains that this model continues to sell well in foreign markets but it worries that fixed costs are so large that it is difficult to earn a profit. The Tableau Dashboard is provided to aid our analysis of this model.

TOTAL FIXED COSTS:

factory expense = $10,250,000

production manager salaries = $8,500000

insurance expense = $6,000,000

equipment (straight-line) depreciation expense = $5,350,000

advertising expense = $5,000,000

VARIABLE COSTS PER UNIT:

battery = $10

camera = $45

internal components = $90

receiver = $35

screen = $95

speaker = $25

SALES PRICE PER UNIT:

iphone sales price per unit $750

Answer the requirements for each of the following separate situations.
1. If Apple expects sales of 100,000 units, compute its margin of safety (a) in dollars and (b) as a percent of expected sales.
2(a). Apple anticipates it will sell 100,000 units in the coming year. It is considering investing in a new machine that will increase its fixed costs by $7,500,000 per year and decrease its variable costs by $40 per unit. Compute net income if Apple does not purchase the machine.
2(b). Apple anticipates it will sell 100,000 units in the coming year. It is considering investing in a new machine that will increase its fixed costs by $7,500,000 per year and decrease its variable costs by $40 per unit. Compute net income if Apple does purchase the machine.
3(a). Apple anticipates it will sell 100,000 units in the coming year. A marketing executive believes that increasing advertising costs by $4,000,000 will increase Apple’s sales volume to 110,000 units. Compute net income if Apple does not increase advertising expenses.
3(b). Apple anticipates it will sell 100,000 units in the coming year. A marketing executive believes that increasing advertising costs by $4,000,000 will increase Apple’s sales volume to 110,000 units. Compute net income if Apple does increase advertising expenses.

Required 1 Required 2A Required 2B Required 3A Required 3B If Apple expects sales of 100,000 units, compute its margin of safety (a) in dollars and (b) as a percent of expected sales. Margin of Safety Dollars (a) Percent

Answer 1

Given,
Selling price per unit = 750
variable cost = 300
Contribution / unit = 750-300 = 450
Total Fixed costs = 3,51,00,000
1	Expected sale units = 1,00,000 units
	Profit = 100,000*450 - 35100,000
	= 99,00,000
	Contibution margin = 450/750*100 = 60%
	Margin of Sales = 351,00,000/60%
		= $ 585,00,000
	Margin of Sales = 585,00,000/750,00,000 *100
		= 78%
2(a)	Net Income if apple does not purchase new machine
		= 100,000*450 - 351,00,000
		= 99,00,000
2(b)	New variable cost =300-40 = 260
	Revised contribution = 750 - 260 =490
	Net Income = Total contribution - fixed cost
		= 490*100,000-(351,00,000+75,00,000)
		= 64,00,000
3(a)	Net Income = 99,00,000
	Sales		75,000,000
	variable costs		30,000,000
	Contribution margin		45,000,000
	Fixed costs		35,100,000
	Net Income		9,900,000
3(b)	Sales		82,500,000
	variable costs		33,000,000
	Contribution margin		49,500,000
	Fixed costs		39,100,000
	Net Income		10,400,000