Trimble Company sells an electronic toy for $40. The variable cost is $24 per un

Question

Trimble Company sells an electronic toy for $40. The variable cost is $24 per unit and the fixed cost is $32,000 per year. Management is considering the following changes:

Alternative #1 Lease a new packaging machine for $4,000 per year, which will reduce variable cost by $1 per unit.

Alternative #2 Increase selling price 10 percent to counteract an expected 25 percent increase in fixed cost.

Alternative #3 Reduce fixed cost by 25 percent by moving to a lower rent location. This would have the effect of increasing variable costs by 10 percent.

Required: Consider and answer each of the following questions independently:

Round calculations to the nearest unit (a) Determine the current break-even point in units and dollars. (

b) Determine the expected profit assuming alternative #1 and sales of 3,200 units.

(c) Determine the break-even point in units and dollars assuming alternative #2.

(d) Determine the break-even point required in units and dollars assuming alternative #3.

(e) Determine the volume of sales required to earn $23,600 assuming alternative #3.

Explanation / Answer

Trimble Company Details Amt $ a Current Situation Unit selling price                     40 Unit variable cost                     24 m Unit contribution margin                     16 n Contribution Margin % =16/40= 40.00% o Fixed cost per year               32,000 Break Even point in Units =o/m=               2,000 Break even sales in $=o/n=             80,000 b Alternative 1 Details Amt /unit Total for 3200 units Sale revenue                     40        128,000 Variable cost                       23           73,600 Contribution Margin                       17           54,400 Less Yearly fixed ost including lease of m/c=           46,000 Net Operating Income=             8,400 c Alternative 2 Amt $ Unit selling price                     44 Unit variable cost                     24 m Unit contribution margin                     20 n Contribution Margin % =20/44= 45.45% o Fixed cost per year (with 25% addition)             40,000 Break Even point in Units =o/m=               2,000 Break even sales in $=o/n=             88,000 d Alternative #3 Unit selling price               40.00 Unit variable cost               26.40 m Unit contribution margin               13.60 n Contribution Margin % =13.6/40= 34.00% o Fixed cost per year (with 25% reduction)             24,000 Break Even point in Units =o/m=               1,765 Break even sales in $=o/n=             70,588 e Required earning               23,600 Add fixed costs             24,000 Total Contribution required             47,600 Contribution margin per unit =               13.60 Required sales volume=47600/13.6=               3,500

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