Question

CVP computations. Garrett Manufacturing sold 410,000 units of its product for $68 per unit in 2017. Variable cost per unit is $60, and total fixed costs are $1,640,000. Required 3-22 1. Calculate (a) contribution margin and (b) operating income. 2. Garrett's current manufacturing process is labor intensive. Kate Schoenen, Garrett's production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to $5,330,000. The variable costs are expected to decrease to $54 per unit. Garrett expects to maintain the same sales volume and selling price next year. How would acceptance of Schoenen's proposal affect your answers to (a) and (b) in requirement 1? 3. Should Garrett accept Schoenen's proposal? Explain.

Answer 1

Particulars	Amount
Units sold (A)	410,000
Selling price per unit (B)	68
Variable cost per unit ©	60
Contribution per unit (B) - ©	8
Total Contribution (A) * ©	3,280,000
Less: Fixed costs	1,640,000
Operating Income	1,640,000
Contribution Margin = Contribution per unit / Selling price per unit
Contribution Margin = 8/68 i.e 11.76%
Particulars	Amount
Units sold (A)	410,000
Selling price per unit (B)	68
Variable cost per unit ©	54
Contribution per unit (B) - ©	14
Total Contribution (A) * ©	5,740,000
Less: Fixed costs	5,330,000
Operating Income	410,000
Contribution Margin = Contribution per unit / Selling price per unit
Contribution Margin = 14/68 i.e 20.59%
Proposal should not be accepted as operating income is reducing by $1230000 if the proposal is accepted