Question

Riveria Co. makes and sells a single product. The current selling price is $32 per unit. Variable expenses are $20 per unit, and fixed expenses total $43,200 per month. Sales volume for May totaled 4,100 units. Required: a. Calculate operating income for May. b. Calculate the breakeven point in terms of units sold and total revenues. c. Management is considering installing automated equipment to reduce direct labor cost. If this were done, variable expenses would drop to $14 per unit, but fixed expenses would increase to $67,800 per month. 1. Calculate operating income at a volume of 4,100 units per month with the new cost structure. 2. Calculate the breakeven point in units with the new cost structure. (Round your answer.) 3. Why would you suggest that management seriously consider investing in the automated equipment and accept the new cost structure

Answer 1

Step-by-step explanation:

Rivera Co

Selling price $32

Less Variable costs $20

Contribution $12

Sales Volume 4,100 units

A.

Sales = $131,200

Variable costs = $82,000

Contribution = $49,200

Fixed costs = $43,200

Gross profit/ operating income = $6,000

B.

Break even.point (units)= fixed costs divided by contribution per unit

= 43,200 / 12

= 3,600 units

Break even point sales = Break even point (units) x unit selling price

= 3,600 x $32

= $115,200

C.

Sales = $131,200

Variable costs = $57,40

Contribution = $73,800

Fixed costs = $67,800

Gross profit/ operating income = $16,000

D.

Break even.point (units)= fixed costs divided by contribution per unit

= 67,800 / ($32 - $14)

= 3,767 units

Break even point sales = Break even point (units) x unit selling price

= 3,767 x $32

= $120,533

E.

Management should consider the project because Operating income increased by $10,000.

However it takes more sales effort to break even (additional 167units more)