CVP analysis—effects of change in cost structure; breakeven Ozark, Inc., produces small-scale replicas of vintage automobiles for collectors and museums. Finished products are built on a 1/20 scale of originals. The firm’s income statement showed the following:
Revenues (2,400 units) | $1,584,000 |
Variable expenses | 871,200 |
Contribution margin | $ 712,800 |
Fixed expenses | 520,000 |
Operating income | $ 192,800 |
An automated stamping machine has been developed that can efficiently produce body frames, hoods, and doors to the desired scale. If the machine is leased, fixed expenses will increase by $58,000 per year. The firm’s production capacity will increase, which is expected to result in a 25% increase in sales volume. It is alsoestimated that labor costs of $33 per unit could be saved because less polishing and finishing time will be required.
Required:
a.Calculate the firm’s current contribution margin ratio and break-even point in terms of revenues. (Round your answer.)
b. Calculate the firm’s contribution margin ratio and break-even point in terms of revenues if the new machine is leased.
c. Calculate the firm’s operating income assuming that the new machine is leased.
d. Do you believe that management of Ozark, Inc., should lease the new machine? Explain your answer.
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