XX Company makes consumer electronics. Last year XX sold 25000 units at $25 each
ID: 2368572 • Letter: X
Question
XX Company makes consumer electronics. Last year XX sold 25000 units at $25 each. Total costs equaled $525000, of which $150000 were fixed.XX is considering replacing a compnanent part that had a cost of $2.50 with a new part costing $4.50 per unit next year. A new machine would be needed to increase plant capacity. This machine would coost 18000 with a useful life of 6 years, no salvage value. The company uses straight line depreciation on all plant assets (ignore income taxes).
Needed:
1. What is XX's break even point in units last year?
2. How many units would the company have to sell in the last year to earn $140000?
3.If mgmt holds the sales price constant and makes the new changes, how many units will the company need to sell to break even in coming year?
4.Same scenario as (3), but how many units to achieve same net income as previous year?
5. If XX wishes to maintain the same contribution margin ratio, what selling price per unit of product must it charge next year to cover the increated direct-material cost?
my solutions are as follows (need to check for what I have):
1. 15000 units
2. 725000 units - not sure...
3-5...no idea
Explanation / Answer
Total Cost 525000 - Fixed cost 150000 = Var cost 375000 Var cost pu = Total Var cost/No of units sold = 375000/25000 = $15pu SO COnt pu = Sale price pu - Var cost pu = 25-15 = $10pu.......(A) 1. What is XX's break even point in units last year? BEP = Fixed cost/Cont pu = 150000/10 = 15000 units 2. How many units would the company have to sell in the last year to earn $140000? Net Inc = Total Cont - Fixed costs SO Total COnt = Net Inc + FC = 140000+150000 = 290,000 ie No of Units * Cont pu = 290,000 ie No of Units = 290,000/10 = 29000 units. So 29000 units have to be sold for a Net Inc of $140,000 3.If mgmt holds the sales price constant and makes the new changes, how many units will the company need to sell to break even in coming year? New MAchine cost = 18000 & Life 6 yrs So Dep pa = 18000/6 = $3000 New Var cost pu = $15-2.50+4.50 = $17 pu So New COnt pu = SP pu - VC pu = 25-17 = $8 pu New Fixed cost = Old FC + Dep on New Machine = 150000+3000 = 153000 So New BEP = New Fixed cost/New cont pu = 153000/8 = 19,125 units 4.Same scenario as (3), but how many units to achieve same net income as previous year? Net Inc = New Total Cont - New Fixed costs SO NewTotal COnt = Net Inc + New FC = 140000+153000 = 293,000 ie No of Units * Cont pu = 293,000 ie No of Units = 293,000/8 = 36,625 units. So 36625 units have to be sold for a Net Inc of $140,000 with new Var cost pu 5. If XX wishes to maintain the same contribution margin ratio, what selling price per unit of product must it charge next year to cover the increated direct-material cost? Old CM Ratio = Cont pu/SP pu = 10/25 = 40% ie (SP pu-VC pu) = 0.4*SP pu ie 0.6*SP pu = VC pu SO SP pu = VC pu/0.6 = 17/0.6 = $28
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