• Question 2-61, CVP in a Modern Manufacturing Company, on p. 87 A division of H
ID: 2434840 • Letter: #
Question
• Question 2-61, CVP in a Modern Manufacturing Company, on p. 87A division of Hewlett-Packard Company changed its production operations from one where a large labor force assembled electronic components to an automated production facility dominated by computer-controlled robots. The change was necessary because of fierce competitive pressures. Improvements in quality, reliability, and flexibility of production schedules were necessary just to match the competition. As a result of the change, variable costs fell and fixed costs increased, as shown in the following assumed budgets.
_________________________________________________________________________
Old Production Operation New Production Operation
__________________________________________________________________________________________________________________________________________________________
Unit variable cost
Material $ .88 $ .88
Labor 1.22 .22
__________________________________________________________________________________________________
Total per unit $ 2.10 $ 1.10
_________ _________________________________________________________________________________________
Monthly fixed cost
Rent and depreciation $450,000 $875,000
Supervisory labor 80,000 175,000
Other . 50,000 90,000 ___________________________________________________________________________________________________
Total per month $580,000 $1,140.000 ___________________________________________________________________________________________________
Expected volume is 600,000 units per month, with each unit selling for $3.10. Capacity is 800,000 units.
1. Compute the budgeted profit at the expected volume of 600,000 unites under both the old and the new production environments.
2. Compute the budgeted break-even point under both the old and the new production environments.
3. Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production environments
4. discuss the effect on profits if volume increases to 700,000 units under both the old and the new production environments.
5. Comment on the riskiness of new operation versus the old operation.
• Question 2-61, CVP in a Modern Manufacturing Company, on p. 87
A division of Hewlett-Packard Company changed its production operations from one where a large labor force assembled electronic components to an automated production facility dominated by computer-controlled robots. The change was necessary because of fierce competitive pressures. Improvements in quality, reliability, and flexibility of production schedules were necessary just to match the competition. As a result of the change, variable costs fell and fixed costs increased, as shown in the following assumed budgets.
_________________________________________________________________________
Old Production Operation New Production Operation
__________________________________________________________________________________________________________________________________________________________
Unit variable cost
Material $ .88 $ .88
Labor 1.22 .22
__________________________________________________________________________________________________
Total per unit $ 2.10 $ 1.10
_________ _________________________________________________________________________________________
Monthly fixed cost
Rent and depreciation $450,000 $875,000
Supervisory labor 80,000 175,000
Other . 50,000 90,000 ___________________________________________________________________________________________________
Total per month $580,000 $1,140.000 ___________________________________________________________________________________________________
Expected volume is 600,000 units per month, with each unit selling for $3.10. Capacity is 800,000 units.
1. Compute the budgeted profit at the expected volume of 600,000 unites under both the old and the new production environments.
2. Compute the budgeted break-even point under both the old and the new production environments.
3. Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production environments
4. discuss the effect on profits if volume increases to 700,000 units under both the old and the new production environments.
5. Comment on the riskiness of new operation versus the old operation.
Explanation / Answer
1) Old revenue 3.10(600,000) = 1,860,000 Old cost 580,000 + 2.10(600,000) = 1,840,000 This results in a profit of 20,000 New revenue (same as old), 1,860,000 New cost 1,140,000 + 1.10(600,000) = 1,800,000 This results in a profit of 60,000 2) Let x = units produced and sold Old 3.10x = 580,000 + 2.10x subtract 2.1x from both sides 1.00x = 580,000 x = 580,000 units to break even New 3.10x = 1,140,000 + 1.10x 2.00x = 1,140,000 x = 570,000 units to break even 3) 500,000 production computed same manner as #1 above Old revenue 3.10(500,000) = 1,550,000 Old cost 580,000 + 2.10(500,000) = 1,630,000 This results in a loss of 80,000 New revenue (same as old), 1,550,000 New cost 1,140,000 + 1.10(500,000) = 1,690,000 This results in a loss of 140,000 4) 700,000 production computed same manner as #1 above Old revenue 3.10(700,000) = 2,170,000 Old cost 580,000 + 2.10(700,000) = 2,050,000 This results in a profit of 120,000 New revenue (same as old), 2,170,000 New cost 1,140,000 + 1.10(700,000) = 1,910,000 This results in a profit of 260,000 5) The break even points of 570,000 and 580,000 are very close for the old and new systems. The losses increase at a higher rate with the new system, the further the company gets below the break even point. However, the profits increase at a higher rate with the new system when production exceeds the break even point. Generally, at or around the break even point there is not a huge difference between the two methods, however if sales are expected to well exceed these numbers, the new system will prove to be significantly more profitable. Aside from this, the increase in quality with the new system due to the automation could prove to add profitability by reducing product quality issues.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.