Davidson Manufacturing scld 400,000 units of its product for S69 per unit in 201

Question

Davidson Manufacturing scld 400,000 units of its product for S69 per unit in 2017. Variable cost per unit is $61, and total fixed costs are $1,600,000 Read the requirements Requirement 1. Calculate (a) contribution margin and (b) operating income (a) Determine the formula used to calculate the contribution margin. Sale price per unitTotal variable costs The contribution margin is $ (b) Determine the formula used to calculate the operating income. Contribution margin Operating Income Operating income is S Requirement 2. Davidson's current manufacturing process is labor intensive. Kate Fischer, Davidson's production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to $6,000,000. The variable costs are expected to decrease to $41 per unit Davidson expects to maintain the same sales volume and selling price next year. How would acceptance of Fischer's proposal affect your answers to (a) and (b) in requirement 1? Recalculate (a) and (b) if the proposal is accepted. (a) The contribution margin would be $ under Fischer's proposal.

Explanation / Answer

Req 1-a: Total sales (400,000 units @ 69): 27600000 Variable cost (400000 units @ 61): 24400000 Contribution margin Total sales   - Total Variable cost = Contribution Margin 27600,000 - 24400,000 = 3,200,000 Operating Income: Contribution Margin - Total fixed cost = Operating Income 3200,000 - 1600,000    = 1,600,000 Req 2: Total sales: 27,600,000 Less: Revised Variable cost 16,400,000 (400,000 units @41) Contribution margin Total sales   - Total Variable cost = Contribution Margin 27600,000 - 16,400,000 11,200,000 Operating Income: Contribution Margin - Total fixed cost = Operating Income 11,200,000 6,000,000 5,200,000 Req 3: Operating Income is expected o increase by 3600,000. Bbased on operating income only, Davidson should accept the proposal It is likely that product will improve as a result of using State of art equipment. However, the proposal has increased the company fixed cost. This will increase the operating leverage and risk.

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