Question

3-22 CVP computations. Simplex Inc. sells its product at $80 per unit with a contribution margin of 40%. During 2016, Simplex sold 540,000 units of its product; its total fixed costs are $2,100,000. 1. Calculate the (a) contribution margin, (b) variable costs, and (c) operating income. 2. The production manager of Simplex has proposed modernizing the whole production process in order to save labor costs. However, the modernization of the production process will increase the annual fixed costs by $3,800,000. The variable costs are expected to decrease by 20%. Simplex Inc. expects to maintain the same sales volume and selling price next year. How would the acceptance of the produc- tion manager's proposal affect your answers to (a) and (c) in requirement 1? 3. Should Simplex accept the production manager's proposal? Explain.

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Answer 1

Answers are attached below

Answer 1 (a) Contribution Margin = Units * Contribution per unit 540,000 * (80*40%) $ 17,280,000 (6) Variable Costs = Units * Variable Cost per unit 540,000 * (80*(100%-40%)) $ 25,920,000 (c) Operating Income = Contribution margin - Fixed Costs 17,280,000 - 2,100,000 $ 15,180,000 Answer 2 (a) Contribution margin = 540,000 * (80*(100%-(60%*(1-0.2))) $ 22,464,000 (b) Variable Costs 540,000 * (80*60%*(1-0.2)) $ 20,736,000 (c) Operating Income 22,464,000 - (2,100,000 + 3,800,000) $ 16,564,000 Answer 3 Yes, Simplex should accept the production manager's proposal as there is increase in Operating income of $1,384,000 (16,564,000 - 15,180,000)