The Westover Company manufactures and sells pens. Currently, 5,100,000 units are

Question

The Westover Company manufactures and sells pens. Currently, 5,100,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit. Read the requirements. Requirement 1. What is the current annual operating income? {a} Start by determining the formula to calculate operating income. The current annual operating income is $ (b) What is the present breakeven point in revenues? Determine the formula to calculate the breakeven point in revenues. The present breakeven point in revenues equal $ = Operating income Compute the new operating income or loss for requirements 2 through 4. Requirement 2. A $0.05 per unit increase in variable costs results in a new operating Requirement 3. A10% increase in fixed costs and a 10% increase in units sold results in a new operating

Explanation / Answer

Westlover Company All Amounts in $ Requirement 1 (a) Formula to calculate Operating Income Sales Quantity 5100000 Sales Price per unit 0.5 Sales Value 2550000 Less : Variable Costs 1530000 Contribution Margin 1020000 Fixed Costs 900000 Operating Income 120000 (b) Breakeven Point in Revenues Assuming the sales quantity for breakeven as X 0.5X - 0.3X = $ 900,000 Thus, 0.2X = $ 900,000 or X = 900,000 / 0.20 = 4,500,000 units At this level of breakeven, the revenues are 4,500,000 X 0.50 = $ 2,250,000 Requirement 2 A $ 0.05 per unit increase in Variable Costs results in a decrease in Net Operating Income by 5,100,000 X 0.05 $ = 255000 Thus, the New Operating Income is $ 120,000 - $ 255,000 = a loss of $ 135,000 Requirement 3 A 10% increase in fixed costs and a 10% increase in units sold will lead to the following : Increase in Contribution Margin by (5,100,000 X 10%) X (0.5 - 0.3) = 102000 $ Increase in Fixed Costs by 10% of $ 900,000 = 90000 $ Net Increase in Operating Income by 12000 $

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