Martin Corporation sells component parts for the electronics industry. Martin Co

Question

Martin Corporation sells component parts for the electronics industry. Martin Corporation currently sells 160,000 units per year at a price of $6.50 per unit; its variable cost is $4.00 per unit; and fixed costs are $350,000 for the year. Martin is considering expanding into two additional states, which would increase its fixed costs to $570,000 and would increase its variable unit cost to an average of$4.24 per unit. If Martin expands, it expects to sell 250,000 units at $7.10 per unit.

1. How much operating profit (EBIT) is Martin Corporation currently realizing, with a sales volume of 160,000

units per year?

a. What is Martin Corporation

Explanation / Answer

1)Cost per unit= $4.00
   Revenue per unit=  $6.50
Profit per unit= $6.5 - $4 =$2.5
Total Profit earned= Total Profit earned by selling goods - Fixed Cost
   = Total Units sold * Profit earned per unit -Fixed Cost
   = 160,000 * $2.5 - $350,000
   = $400,000 - $350,000
   = $50,000

a) Break Even point is that point where total profit = 0
1) Let Q be break-even units.
=> 0 = Q* $2.5 - 350,000
=> Q = 350,000 / 2.5 = 140,000 units
2) R be break even sales in dollars,
=> R = Q * $6.5 = 140,000 * 6.5 = $910,000

2) For new additional states,
Cost per unit= $4.24
   Revenue per unit=  $7.1
Profit per unit= $7.1 - $4.24 =$2.86
Total Profit earned= Total Profit earned by selling goods - Fixed Cost
   = Total Units sold * Profit earned per unit -Fixed Cost
   = 250,000 * $2.86 - $570,000
   = $715,000 - $570,000
   = $145,000
a) Break Even point is that point where total profit = 0
1) Let Q be break-even units.
=> 0 = Q* $2.86 - 570,000
=> Q = 570,000 / 2.86 = 199,300 units
2) R be break even sales in dollars,
=> R = Q * $7.14 = 193,300 * 7.14 = $1,423,006

3) From the above analysis it is clear that without expansion he earns a profit of $50,000 and with expansion $1,45,000.
So, he must continue with the expansion plan.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.