Question

6. Kerrigan Garage Doors manufactures a premium garage door. Currently, the price and cost data associated with the premium garage door are as follows: (Click the icon to view the data.) 2 (Click the icon to view more information.) Read the requirements Requirement 1. What is the company's current breakeven in units and in dollars? Begin by identifying the formula to compute the breakeven sales in units using the contribution margin approach. 1 Fixed expenses Operating income / Contribution margin per unit = Breakeven sales in units The breakeven point in units is units. The breakeven point in dollars is $ Requirement 2. If the company expects to sell 340 premium garage doors in the upcoming year, and it does not develop the software control system, what is its expected operating income from premium garage doors? Begin by identifying the formula to compute the operating income. (1) (2) (3) Operating income If the company expects to sell 340 garage doors, and it does not develop the software control system. its expected operating income is $ Requirement 3. If the software control system were to be developed and implemented, what would be the company's new breakeven point in units and in dollars? The breakeven point in units is units. The breakeven point in dollars is $ . Requirement 4. If the company expects to sell 340 premium garage doors in the upcoming year, and it develops the software control system, what is its expected operating income from premium garage doors? If the company expects to sell 340 garage doors, and it develops the software control system, its expected operating income is $ Requirement 5. If the company expects to sell 340 premium garage doors in the upcoming year, do you think the company should implement the software control system? Why or why not? What factors should the company consider? implement the software control system. At this level of sales, implementing the ., the company (5) software control system would result in a (6) operating income. The company should also consider (7) 1: Data Table Average selling price per premium garage door...... Average variable manufacturing cost per door ....... Average variable selling cost per door ............. Total annual fixed costs............................. $ 3,000 540 210 270,000

Answer 1

Current

With software control system

Selling Price p.u

$3,000

$3,000

-Variable mfg cost p.u.

-$540

-$390

=540-150

-Variable selling cost p.u.

-$210

-$210

Contribution p.u

$2,250

$2,400

Contribution Margin Ratio

75%

=2250/3000

80%

=2400/3000

Fixed Cost

$2,70,000

$2,40,000

1. Current Break-even Point

(a) In Units:

=Fixed Expenses/Contribution Margin p.u

=270000/2250

120

Units

(b) In Dollars:

=Fixed Expenses/Contribution Margin Ratio

=270000/75%

$3,60,000

2. Expected Operating Income

=(Units sold * Contribution Margin p.u)-Fixed Expenses

=(340*2250)-270000

$4,95,000

3. New Break-even Point

(a) In Units:

=Fixed Expenses/Contribution Margin p.u

=240000/2400

100

Units

(b) In Dollars:

=Fixed Expenses/Contribution Margin Ratio

=240000/80%

$3,00,000

4. Expected Operating Income with software control system

=(Units sold * Contribution Margin p.u)-Fixed Expenses

=(340*2400)-240000

$5,76,000

5

(4)Yes, the company (5) should implement the software control system. At this level of sales, implementing the software control system would result in a (6) Higher operating Income. The company should also consider (7) the potential savings from reduced scrap and waste.