Response to the following problem:
Phoenix based Comp Tronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 50,500 speaker sets:
Sales $5,807,500
Variable costs $1,767,500
Fixed costs $3,450,000
Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $30.00 per set; annual fixed costs are anticipated to be $ 3,400,000 (In the following requirements, ignore income taxes)
Required:
1. Calculate the company current income and determine the level of dollar sales needed to double the figure assuming the manufacturing operations remain in the United States.
2. Determine the break-even point in speaker sets if operations are shifted to Mexico.
3. Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the US.
a. If variable costs remain constant, what must management do to fixed costs? By how much must fixed costs change?
b. If fixed costs remain constant, what must management do to the variable cost per unit? By how much must unite variable cost change?
4. Determine the impact (increase, decrease or no effect) of the following operating changes.
a. Effect of an increase in direct material costs on the break-even point.
b. Effect of an increase in fixed administrative costs on the unit contribution margin.
c. Effect of an increase in the unit contribution margin on net income.
d. Effect of a decrease in the number of units sold on the break-even point.