CVP application — expand existing product line? Nautical Canvas Co. currently makes and sells two models of a boat cover. Data applicable to the current operation are summarized in the following columns labeled Current Operation. Management is considering adding a Value model to its current Luxury and Economy models. Expected data if the new model is added are shown in the following columns labeled Proposed Expansion:
| Current Operation | Proposed Expansion |
| |||
Luxury | Economy | Luxury | Economy | value |
| |
Selling price per unit | $2,000 | $1,200 | $2,000 | $1,200 | $1,500 |
|
Variable expenses per unit | 800 | 700 | 800 | 700 | 800 |
|
Annual sales volume—units | 1,000 | 2,000 | 600 | 1,700 | 800 |
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Fixed expenses for year | Total of $700,000 | Total of $840,000 |
|
| ||
Required:
a.Calculate the company’s current total contribution margin and the current average contribution margin ratio.
b. Calculate the company’s current amount of operating income.
c. Calculate the company’s current break-even point in dollar sales.
d. Explain why the company might incur a loss, even if the sales amount calculated in part c was achieved and selling prices and costs didn’t change.
e. Calculate the company’s total operating income under the proposed expansion.
f. Based on the proposed expansion data, would you recommend adding the Value model? Why or why not?
g. Would your answer to part f change if the Value model sales volume were to increase to 1,000 units annually, and all other data remained the same? Why or why not?
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