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 41,000 speaker sets:

Sales $3,362,000
Variable costs 840,500
Fixed costs 2,310,000
Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $20.00 per set; annual fixed costs are anticipated to be $1,986,000.
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.
4. If variable costs remain constant, by how much must fixed costs change?
5. If fixed costs remain constant, by how much must unit variable cost change?
6. Determine the impact (increase, decrease, or no effect) of the following operating changes.
A) Effect of an increase in direct material costs on the break-even point.
B) Effect of an increase in fixed administration costs on the unit contribution margin.
C) Effect of an increase in the unit contribution margin on net income.
D) Effect of a decrease in the number of units sold on the breakeven point.

Answer 1

1. $211,500 and $3,644,000

2. 32,033 speaker sets (Mexican)

3. 32,033 speaker sets (Mexican required Break even)

4. $323,954 decrease

5. $11,11 decrease

6. Determining Effects :

A. decrease

B. no effect

C. increase

D. no effect

Step-by-step explanation:

Part 1

a

Income = Contribution (Sales - Variable Costs) - Fixed Costs

therefore,

Income = $3,362,000 - $840,500 - $2,310,000 = $211,500

b

Double the figure of income = $211,500 x 2 = $423,000

Sales to achieve target profit = Target Profit + Fixed Cost ÷ Contribution Margin

where,

Contribution Margin = Contribution (Sales - Variable Costs) ÷ Sales

= ($3,362,000 - $840,500) ÷ $3,362,000

= 0.75

therefore,

Sales to achieve $423,000 profit = ($423,000 + $2,310,000) ÷ 0.75

= $3,644,000

Part 2

Break even point (speaker sets) = Fixed Cost ÷ Contribution per unit

where,

Fixed Cost = $1,986,000

Contribution per unit = ($3,362,000 / 41,000) - $20.00 = $62.00

therefore,

Break even point (speaker sets) = $1,986,000 ÷ $62.00

= 32,033 speaker sets

Part 3

Mexico :

Break even point (speaker sets) = Fixed Cost ÷ Contribution per unit

where,

Fixed Cost = $1,986,000

Contribution per unit = ($3,362,000 / 41,000) - $20.00 = $62.00

therefore,

Break even point (speaker sets) = $1,986,000 ÷ $62.00

= 32,033 speaker sets

United States :

Break even point (speaker sets) = Fixed Cost ÷ Contribution per unit

where,

Fixed Cost = $2,310,000

Contribution per unit = ($3,362,000 / 41,000) - ($840,500 / 41,000) = $61.50

therefore,

Break even point (speaker sets) = $2,310,000 ÷ $61.50

= 37,561 speaker sets

Part 4

Break even point (speaker sets) = Fixed Cost ÷ Contribution per unit

where,

US Fixed Cost = $2,310,000

Fixed Cost Required = Unknown

Contribution per unit = $82.00 - $20.00 = $62.00

therefore,

Fixed Cost = Breakeven Point x Contribution per unit

= 32,033 speaker sets x $62.00

= $1,986,046

Change in Fixed Costs = $323,954 decrease ($2,310,000 - $1,986,046)

Part 5

Break even point (speaker sets) = Fixed Cost ÷ Contribution per unit

where,

US Fixed Cost = $2,310,000

US Contribution per unit = $82.00 - $20.00 = $62.00

Contribution per unit = $82.00 - V = Unknown

therefore,

Contribution per unit = Fixed Costs ÷ Breakeven point

= $2,310,000 ÷ 32,033 speaker sets

= $73.11

Variable Cost = Selling Price - Contribution per unit

= $82.00 - $73.11

= $8.89

Change in Variable Cost = $11,11 decrease ($20.00 - $8.89)