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	$	3,280,000
Variable costs		820,000
Fixed costs		2,310,000

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 $1,986,000. (In the following requirements, ignore income taxes.)

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?

Answer 1

ANSWER:

(A)

Current income,

Sales Less: variable cost	$3280000 $820000
Contribution margin Less: fixed cost	$2460000 $2310000
Net income	$150000

(B)

Desired net income = $150000 x 2 = $300000

We need such break even point (sales dollar) which will cover both fixed cost and desired net income,

Therefore in computing break even point (sales dollar) for our convenience lets take,

revised fixed cost = fixed cost + desired net income

= $2310000 + $300000 = $2610000

Contribution margin ratio = contribution margin/sales

= ($2460000/$3280000) x 100 = 75%

Therefore,

Break even point (units) = revised fixed cost/contribution margin per unit

= $2610000/75%

= $3480000

(C)

If operations are shifted to Mexico,

Contribution margin per unit = ($3280000/40000) - $18

= $82 - $18 = $64

And, fixed costs = $1986000

Therefore,

Break even point (units) = $1986000/$64

= 31031 units

(D)

Option 1,

Break even point (units) = fixed cost/contribution margin per unit

31031 units = fixed cost/$61.5

Therefore,

Fixed cost = 31031 x $61.5 = $1908406.5

Where, contribution margin per unit in United States = $2460000/40000 = $61.5

Option 2,

31031 units = $2310000/contribution margin per unit

Therefore,

Contribution margin per unit = $2310000/31031 = $74.44

Therefore,

Variable cost per unit = selling price per unit - contribution margin per unit

= $82 - $74.44

= $7.56