Austin, Inc., produces small-scale replicas of vintage automobiles for collector
ID: 2569270 • Letter: A
Question
Austin, Inc., produces small-scale replicas of vintage automobiles for collectors and museums. Finished products are built on a 1/20 scale of originals. The firm's income statement showed the following Revenues (1,550 units) Variable expenses Contribution margin Fixed expenses Operating income $819,000 478,400 $340,600 297,900 42,700 An automated stamping machine has been developed that can efficiently produce body frames, hoods, and doors to the desired scale. If the machine is leased, fixed expenses will increase by $38,900 per year. The firm's production capacity will increase, which is expected to result in a 17% increase in sales volume. It is also estimated that labor costs of $28 per unit could be saved because less polishing and finishing time will be required Required a. Calculate the firm's current contribution margin ratio and break-even point in terms of revenues. (Round your intermediate calculations to nearest whole number.) 42 % | Contribution margin ratio Break-even point S 709,286 b. Calculate the firm's contribution margin ratio and break-even point in terms of revenues if the new machine is leased. (Round your intermediate calculations to nearest whole number.) 4 % Contribution margin ratio Break-even point $ 716,596Explanation / Answer
Ans:
a. Current margin ratio= contribution margin/Revenues=$340600/$819000
= 42%
Break-even point in terms of revenues= $297900/42%=$709286
b. Revised revenues after machine is leased =$819000*117%=$958230
Variable cost = $478400*117%-$28*1814
= $559728-$50792=$508936
Contribution margin= $958230-$508936=$449294
Contribution margin ratio= $449294/$958230=47%
Break-even point in terms of revenues= $297900+$38900/47%
= $716596
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