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 44,000 speaker sets:

Sales $3,608,000
Variable costs 902,000
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 $1,988,000. (In the following requirements, ignore income taxes.)

Required:
a. 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.
b. Determine the break-even point in speaker sets if operations are shifted to Mexico.
c. If variable costs remain constant, by how much must fixed costs change?

Answer 1

a. Net Income = $396,000 and Sales to reach Target Profit $4,136,000

b. 32,065 speaker sets

c. $338,002

Step-by-step explanation:

Part a

Company’s current income

Sales $3,608,000

Less Variable costs ($902,000)

Contribution $2,706,000

Less Fixed costs ($2,310,000)

Net Income $396,000

The level of dollar sales needed to double that figure

Double the Income figure gives $792,000

Sales to reach Target Profit = (Target Profit + Fixed Costs) ÷ Contribution Margin ratio

= ($792,000 + $2,310,000) ÷ 0.75

= $4,136,000

Part b

The break-even point in speaker sets if operations are shifted to Mexico

Break even point = Fixed Cost ÷ Contribution per unit

= $1,988,000 ÷ ($82.00 - $20.00)

= 32,065 speaker sets

Part c

If variable costs remain constant, by how much must fixed costs change

New Fixed Cost = Break even point x Contribution per unit

= 32,065 x ($82.00 -$20.50)

= $1,971,998

Change in Fixed Costs = $2,310,000 - $1,971,998 = $338,002