FACTS: 1. Elliott Incorporated manufactures garden tools, and although the manuf
ID: 2419201 • Letter: F
Question
FACTS:
1. Elliott Incorporated manufactures garden tools, and although the manufacturing equipment is perfectly functional, it is not modern.
2. Upgrading to modern equipment would speed up the manufacturing process such that direct labor and variable manufacturing costs
would be reduced by 40% on a per-unit basis. Hint: You do not need current units produced to calculate this problem.
3. The cost of such an upgrade would equal $1,500,000 per year for depreciation and financing costs net of tax benefits of these costs.
4. The additional costs would be accounted for as fixed manufacturing overhead.
5. Elliott is currently operating at full capacity and management believes they could increase sales to $6,000,000 at current prices if
they had additional capacity.
Elliott's current sales and costs are as follows:
Sales $4,500,000
Direct materials 780,000
Direct labor 1,540,000
Manufacturing overhead–variable 364,500
Manufacturing overhead–fixed 750,000
Selling expenses–variable 90,000
Selling expenses–fixed 250,000
Administrative expenses–variable 60,000
Administrative expenses–fixed 200,000
Answer/Compute the following Parts:
A. Prepare a CVP based on the proposed equipment upgrade.
B. Compute contribution margin ratio based on the proposed equipment upgrade.
C. Compute breakeven dollars for current production upgrade.
D. Should Elliott proceed with the proposed upgrade?
Explanation / Answer
a Sales 4500000 Less:variable cost Direct materials 780000 Direct labor 1540000 Manufacturing overhead–variable 364500 Selling expenses–variable 90000 Administrative expenses–variable 60000 contribution 1665500 Less:fixed cost Manufacturing overhead 750000 Selling expenses 250000 Administrative expenses 200000 profit 465500 contribution margin 37.01% (current) b contribution margin (propsed) Sales 6000000 Less:variable cost 1700700 contribution 4299300 contribution margin 71.66% (propsed) c break even sales (current) (fixed cost/contribution margin) 3242269.589 d Statement showing upgrade option analysis Additional cost on upgrade 1500000 Loss on contribtuion on 2633800 (4299300-1665500) Total cost 4133800 Comment:As there is no savings in this option, so this option should not be choosen.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.