Question

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $58,000 each month. a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales b. Assume that the company expects to sell 20,300 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total. for each alternative.) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,300)? Complete this question by entering your answers in the tabs below Req 2 Req 3 Req 4 Req SA Req 5B Req 5C Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $58,000 each month. Compute the new CM ratio and the new break-even point in unit sales and dollar sales. (Round "CM ratio" to the nearest whole percent and other answers to the nearest whole number.) CM ratio K Req 4 Req 5B Prev2 of 2 Next>

Answer 1

5.

Variable cost per unit = 159,600/13,300

= $12

Variable cost is expected to decrease by $3 per unit

Hence, new variable cost per unit = 12 - 3

= $9

Fixed cost is expected to increase by $58,000

Hence, new fixed cost = 118,400 + 58,000

= $176,400

a)

Contribution margin = Sales price - Variable cost

= 20 - 9

= $11

Contribution margin ratio = Contribution margin/Sales

= 11/20

= 55%

Break even sales (units) = Fixed cost/Contribution margin per unit

= 176,400/11

= 16,036

Break even sales ($) = Fixed cost/Contribution margin ratio

= 176,400/55%

= $320,727

b)

Contribution income statement

	Not Automated			Automated
	Total	Per unit	%	Total	Per unit	%
Sales	406,000	20	100%	406,000	20	100%
Variable expenses	243,600	12	60%	182,700	9	45%
Contribution margin	162,400	8	40%	223,300	11	55%
Fixed expenses	118,400			176,400
Operating income	44,000			46,900

c)

The company should go for automation since it will increase the operating income of the company by $2,900 i.e. 46,900 - 44,000.

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