CVP Analysis Horton Manufacturing Inc. (HMI) is suffering from the effects of increased local and global competition for its main product, a lawn mower that is sold in discount stores throughout the United States. The following table shows the results of HMI’s operations for 2010.
Sales (11,000 units @ $90) | $990,000 |
Less variable costs (11,000 @ $63) | 693,000 |
Contribution margin | $297,000 |
Less fixed costs | 324,000 |
Operating Loss | ($ 27,000) |
Required
1. Compute HMI’s breakeven point in both units and dollars. Also, compute the contribution margin ratio.
2. The manager believes that a $60,000 increase in advertising would result in a $135,000 increase in annual sales. If the manager is right, what will be the effect on the company’s operating profit or loss?
3. Refer to the original data. The vice president in charge of sales is certain that a 10 percent reduction in price in combination with a $50,000 increase in advertising will cause unit sales to increases by 20 percent. What effect would this strategy have on operating profit (loss)?
4. Refer to the original data. During 2010, HMI saved $5 of unit variable costs per lawn mower by buying from a different manufacturer. However, the cost of changing the plant machinery to accommodate the new part cost an additional $30,000 in fixed cost per year. Was this a wise change, and why or why not?
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