Question

Houston-based Advanced Electronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 40,000 speaker sets:

Sales	$	3,360,000
Variable costs		840,000
Fixed costs		2,250,000

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $18.00 per set; annual fixed costs are anticipated to be $1,984,000. (In the following requirements, ignore income taxes.)

Required:

1. Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States.
2. Determine the break-even point in speaker sets if operations are shifted to Mexico.
3. Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.

1. If variable costs remain constant, by how much must fixed costs change?
2. If fixed costs remain constant, by how much must unit variable cost change?

4. Determine the impact (increase, decrease, or no effect) of the following operating changes.

Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States. (Do not round intermediate calculations and round your final answers to nearest whole dollar.)

	Current income    Required dollar sales

Determine the break-even point in speaker sets if operations are shifted to Mexico. (Do not round intermediate calculations and round your final answer up to nearest whole number.)

	Break-even point    units

Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.

a. If variable costs remain constant, by how much must fixed costs change? (Round your intermediate unit calculations to the nearest whole number and round your final answers to the nearest whole dollar.)

b. If fixed costs remain constant, by how much must unit variable cost change? (Round your intermediate unit calculations to the nearest whole number and round your final answer to 2 decimal places.)

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	a. Fixed costs increaseselected answer incorrect by b. Variable costs decreaseselected answer correct by per

Answer 1

1. Income statement

Sales	3,360,000
Less variable cost	(840,000)
Contribution	2,520,000
Less fixed cost	(2,250,000)
Operating income	270,000

Contribution margin ratio = 2,520,000/3,360,000*100 = 75%

Target income = 270,000*2 = 540,000

Desired sales = FC + Target Income /CMR

= 2,250,000 + 540,000 / 75%

=3,720,000

2. Selling price per set = sales / no of sets

=3,360,000/40,000 = $84 per set

BEP(in sets) = FC(if operation shift to Mexico) /contribution (S-VC)

= 1,984,000/ 84-18

= 30061 sets

3. (a) Current VC = 840,000/40,000 = $21 per set

BEP( in sets) = FC /(84-21)

30061 = FC /63

FC = 1,893,843

Change in FC = 2,250,000 - 1,893,843 = $356,157

FC decrease by $356,157

(b) BEP (in sets) = FC(operations shifted to Mexico) /contribution

30061 = 2250000/(84-VC)

VC = 84 -75 = 9 per unit

Change in VC = $21 - $9 = $12 per unit

Variable cost decrease by $12 per unit