Problem 7-37 CVP Analysis; Impact of operating changes
P7-37 Houston-based Advanced Electronics manufactures audio speakers for desktop computers. The following data relates to the period just ended when the company produced and sold 42,000 speaker sets:
Sales $3,360,000
Variable Costs 840,000
Fixed Costs 2,280,000
Management is considering relocating its manufacturing facilities to Northern Mexico to reduce costs. Variable costs are expected to average $18 per set; annual fixed costs are anticipated to be $1,984,000. (Ingors income taxes)
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 remain in the United States.
a) If variable costs remain constant, what must management do to fixed costs? By how much must fixed costs change?
b) If fixed costs remain constant, what must management do to the variable cost per unit? By how much must unit variable cost change?
4. 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 un it contribution margin on net income.
d) Effect of an decrease in the number of units sold on the break even point.
