Question

Bailey Manufacturing sold 435,000 units of its product for $60 per unit in 2017. Variable cost per unit is $50, and total fixed costs are $1,740,000. Read the requirements. Requirement 1. Calculate (a) contribution margin and (b) operating income. (a) Determine the formula used to calculate the contribution margin- Total sales Total variable costs Contribution margin i Requirements The contribution margin is s 4,350,000 (b) Determine the formula used to calculate the operating income. Contribution margin Total fixed costs Operating Income 1. Calculate (a) contribution margin and (b) operating income. 2. Bailey's current manufacturing process is labor intensive. Kate Fischer, Bailey's production manager, proposed Investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to $5,220,000. The variable costs are expected to decrease to S46 per unit. Bailey expects to maintain the same sales volume and selling price next year. How would acceptance of Fischer's proposal affect your answers to (a) and (b) in requirement 17 3. Should Bailey accept Fischer's proposal? Explain. Operating income is S Print Done

Answer 1

BAILEY MANUFACTURING
COMPUTATION OF CONTRIBUTION AND OPERATING INCOME
PARTICULARS	PER UNIT AMOUNT($)	TOTAL AMOUNT($)
SALES	60.00	2,61,00,000.00
LESS VARIABLE COST	50.00	2,17,50,000.00
CONTRIBUTION PER UNIT(SALES - VARIABLE COST)	10.00	43,50,000.00
LESS FIXED COST		17,40,000.00
OPERATING INCOME (CONTRIBUTION- FIXED COST)		26,10,000.00
PV RATIO	CONTRIBUTION/SALES	16.67%
2 )
COMPUTATION OF CONTRIBUTION AND OPERATING INCOME AFTER THE ACCEPTANCE OF PROPOSAL
PARTICULARS	PER UNIT AMOUNT($)	TOTAL AMOUNT($)
SALES	60.00	2,61,00,000.00
LESS VARIABLE COST	46.00	2,00,10,000.00
CONTRIBUTION PER UNIT(SALES - VARIABLE COST)	14.00	60,90,000.00
LESS FIXED COST		52,20,000.00
OPERATING INCOME (CONTRIBUTION- FIXED COST)		8,70,000.00
PV RATIO	CONTRIBUTION/SALES	23.33%
3)
In case of marginal costing only the variable costs are considered for managerial decisions.fixed expenses are assumed as period costs. The profitability of different products is determined by its PV ratio. Therefore in marginal costing the above proposal is acceptable because there ia s hike in contribution from ( 16.66% to 23.33%) and the fixed cost is not considered for managerial decisions.
But in normal criteria the managerial decisions are quitely based on the operation profit hence in that view the proposal is will reject the same because the operation profit reduced from $2610000 to $870000.