The following monthly data are available for the Challenger company and its only
ID: 2388900 • Letter: T
Question
The following monthly data are available for the Challenger company and its only product, Product SW:Total Per Unit
Sales(400 units) 110,000 275
Variable Expenses 44,000 110
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Contribution Margin 66,000 165
Fixed Expenses 52,800
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Net Operating Income 13,200
A)Without resorting to Calculations, what is the total contribution margin at the break even point?
B) Management is contemplating the use of plastic gearing rather than metal gearing in product sw. this change would reduce variable costs by $15. The company's marketing manager predicts that this would
reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made?
C) Assume that Challenger Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made?
D) Assume that Challenger Company is currently selling 400 units of Product Sw. Management wants to automate a portion of the production process for Product Sw. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management also believes that the new equipment will increase the reliability of Product SW thus resulting in an increase in monthly sales of 12%. Should these changes be made?
Explanation / Answer
A. At break even point contribution margin is equal to fixed costs, or 52,800. B. New Contribution Margin would be 350 *(165+15)= 63,000. Since this is less than the current contribution margin the change should not be made. C. New contribution margin will be 600 * (165-20)= 87,000, an increase of 21,000 over the former contribution margin of 66,000. Since this is greater than the increase in the advertising budget of 20,000 the changes should be made. D. New contribution margin would be 448 *(165+20)= 82,880. This is an increase of 82,880-66,000=16,880. Since this is greater than the monthly increase in fixed costs of 10,000 the changes should be made.
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