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 Variable costa Pixed costs $3,360,000 40,000 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 $1,986,000. (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. a. If variable costs remain constant, by how much must fixed costs change? b. 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 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 < Prev 70

Answer 1

1)

Sales	3360000
less:variable cost	-840000
contribution margin	2520000
less:fixed cost	-2250000
Net operating income	270000

contribution margin ratio = contribution /sales

                 = 2520000/ 3360000.

                 = .75 or 75%

In order to achieve double income (270000*2 = 540000 ),Which is a target income ,following formula should be used :

Desired sales =[Fixed cost +Target income ]/contribution margin ratio

               =[2250000+540000]/.75

             = 2790000/.75

              = $ 3720000

2)selling price per set = current sales revenue /number of sets

                     = 3360000/40000

                       = $ 84 per set

Breakeven point (sets) = Fixed cost if operations are shifted to Mexico /(price -variable cost)

                       = 1986000 /(84 - 18)

                        = 1986000 /66

                         = 30091 sets

3)Current variable cost = 840000/40000 = $ 21 per set

In order to achieve Mexican breakeven point :

a)Breakeven point (sets) = Fixed cost if operations are shifted to Mexico /(price -variable cost)'

                 30091 = Fixed cost /(84-21)

                  30091 = fixed cost / 63

                  Fixed cost = 30091*63

                               = $ 1895733

Change in fixed cost =2250000-1895733 = 354267

Fixed cost will decrease by 354267

b)Breakeven point (sets) = Fixed cost if operations are shifted to Mexico /(price -variable cost)

      30091 = 225000/(84- VC)

       84 -VC = 225000/30091

       VC = 84 - 75

             =$ 9 PER unit

change in variable cost = 21 -9 = $ 12 per unit

Variable cost decrease by $ 12 per unit

4)

Increase in direct material cost (variable cost) will decrease contribution margin per unit which in turn increases the breakeven point

b)Increase in fixed cost have no Impact on contribution margin since contribution margin is equals to selling price less variable cost

c)Increase in contribution margin will increase net income

d)Decrease in number of units sold have no impact on breakeven point as it is calculated using the formula

Fixed cost /(price -variable cost)