Question

Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $53,000 each month. Assume that the company expects to sell 20,100 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.) (Do not round your intermediate calculations. Round your percentage answers to the nearest whole number.)

Answer 1

Answer:Sales (19,500 units at $30 per unit) $585,000

Variable expenses 409,500 / 19,500 = $21 per unit

Contribution margin 175,500 / 19,500 = $9 per unit

Fixed expenses 180,000

Net operating loss $(4,500)

New Data

Sales $30 per unit

Variable expenses $18 per unit

Contribution Margin $12 per unit

Fixed expenses $252,000

Compute the new CM ratio

12 / 30 = 40%

and the new break-even point in both units and dollars.

252,000 / 12 = 21,000 units

21,000 x $30 = $630,000

Assume that the company expects to sell 26,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

Using Original Data:

Sales (26,000 units at $30 per unit) $780,000

Variable expenses 546,000

Contribution margin 234,000

Fixed expenses 180,000

Net operating income $54,000

Using New Data

Sales (26,000 units at $30 per unit) $780,000

Variable expenses 468,000

Contribution margin 312,000

Fixed expenses 252,000

Net operating income $60,000