Question

MANAGERIAL ACCOUNTING HANDOUT PROBLEM 4 Name Score Section Problem (10 points). The Bruch Company produces a single product. It sold 25,000 units last year with the following results. THE BRUCH COMPANY CONTRIBUTION MARGIN INCOME STATEMENT FOR PREVIOUS YEAR Sales Less Variable Costs e Costs Contribution Margin Less Fixed Costs Income Before Taxes $ 625,000 375,000 250,000 150,000 100,000 In an attempt to improve its product, Bruch is considering replacement of one of its component parts with a new and better one in the coming year. The part presently used has a cost of $2.50 per unit. The new part would cost $4.50 per unit. A new machine also would be needed to increase plant capacity. The machine would cost $18,000, with a useful life of six years and no salvage value. The company uses straight line depreciation on all plant assets.

Answer 1

Brunch Company

Selling price = Sales / no of units

= $ 625,000 / 25,000 units = $ 25 per unit

Variable cost per unit = Variable cost / no of units

= $ 375,000/ 25,009 units = $ 15 per unit

Contribution per unit = Selling price - Variable cost

1) Break even point = Fixed cost / Contribution per unit

= $ 150,000/ (25-15)

= 150,000/10 = 15,000 units

2) no of units = (Fixed cost + Targeted income) / Contribution per unit

= (150,000+77,000)/10

= 227,000/10 = 22,700 units

3a) Depreciation = (Cost- Salvage value)/life

= 18,000/6 = 3,000 per unit (Fixed cost)

Revised variable cost = 15 - 2.5 + 4.5 = $ 17 per unit

Break even point = Fixed cost / Contribution per unit

= (150,000+3,000)/(25-17)

= 153,000/8 = $ 19,125 units

3b) no of units = (Fixed cost + Target Income) / Contribution per unit

= (153,000+77,000)/8

= 230,000/8

= 28,750 units