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.

Question

dortha34 · Accepted Answer

Answer:1. $211,500 and $3,644,0002. 32,033 speaker sets (Mexican)3. 32,033 speaker sets (Mexican required Break even)4. $323,954 decrease5. $11,11 decrease6. Determining Effects :A. decreaseB. no effectC. increaseD. no effectExplanation:Part 1aIncome = Contribution (Sales - Variable Costs) - Fixed Coststherefore,Income = $3,362,000 - $840,500 - $2,310,000 = $211,500bDouble the figure of income = $211,500 x 2 = $423,000Sales to achieve target profit = Target Profit + Fixed Cost Contribution Marginwhere,Contribution Margin = Contribution (Sales - Variable Costs) Sales = ($3,362,000 - $840,500) $3,362,000 = 0.75therefore,Sales to achieve $423,000 profit = ($423,000 + $2,310,000) 0.75 = $3,644,000Part 2Break even point (speaker sets) = Fixed Cost Contribution per unitwhere,Fixed Cost = $1,986,000Contribution per unit = ($3,362,000 / 41,000) - $20.00 = $62.00therefore,Break even point (speaker sets) = $1,986,000 $62.00 = 32,033 speaker setsPart 3Mexico :Break even point (speaker sets) = Fixed Cost Contribution per unitwhere,Fixed Cost = $1,986,000Contribution per unit = ($3,362,000 / 41,000) - $20.00 = $62.00therefore,Break even point (speaker sets) = $1,986,000 $62.00 = 32,033 speaker setsUnited States :Break even point (speaker sets) = Fixed Cost Contribution per unitwhere,Fixed Cost = $2,310,000Contribution per unit = ($3,362,000 / 41,000) - ($840,500 / 41,000) = $61.50therefore,Break even point (speaker sets) = $2,310,000 $61.50 = 37,561 speaker setsPart 4Break even point (speaker sets) = Fixed Cost Contribution per unitwhere,US Fixed Cost = $2,310,000Fixed Cost Required = UnknownContribution per unit = $82.00 - $20.00 = $62.00therefore,Fixed Cost = Breakeven Point x Contribution per unit = 32,033 speaker sets x $62.00 = $1,986,046Change in Fixed Costs = $323,954 decrease ($2,310,000 - $1,986,046) Part 5Break even point (speaker sets) = Fixed Cost Contribution per unitwhere,US Fixed Cost = $2,310,000US Contribution per unit = $82.00 - $20.00 = $62.00Contribution per unit = $82.00 - V = Unknown therefore,Contribution per unit = Fixed Costs Breakeven point = $2,310,000 32,033 speaker sets = $73.11Variable Cost = Selling Price - Contribution per unit = $82.00 - $73.11 = $8.89Change in Variable Cost = $11,11 decrease ($20.00 - $8.89)

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