FACTS: 1. Elliott Incorporated manufactures garden tools, and although the manuf
ID: 2417058 • Letter: F
Question
FACTS:
1. Elliott Incorporated manufactures garden tools, and although the manufacturing equipment is perfectly functional, it is not modern.
2. Upgrading to modern equipment would speed up the manufacturing process such that direct labor and variable manufacturing costs
would be reduced by 40% on a per-unit basis. Hint: You do not need current units produced to calculate this problem.
3. The cost of such an upgrade would equal $1,500,000 per year for depreciation and financing costs net of tax benefits of these costs.
4. The additional costs would be accounted for as fixed manufacturing overhead.
5. Elliott is currently operating at full capacity and management believes they could increase sales to $6,000,000 at current prices if
they had additional capacity.
Elliott's current sales and costs are as follows:
Sales $4,500,000
Direct materials 780,000
Direct labor 1,540,000
Manufacturing overhead–variable 364,500
Manufacturing overhead–fixed 750,000
Selling expenses–variable 90,000
Selling expenses–fixed 250,000
Administrative expenses–variable 60,000
Administrative expenses–fixed 200,000
Answer/Compute the following:
a. Prepare a CVP for Elliott based on the current production.
b. Compute contribution margin ratio for current production.
c. Compute breakeven dollars for current production.
d. Prepare a CVP based on the proposed equipment upgrade.
e. Compute contribution margin ratio based on the proposed equipment upgrade.
f. Compute breakeven dollars for current production.
g. Should Elliott proceed with the proposed upgrade?
Explanation / Answer
Part A)
CVP
Sales $4,500,000
Less:
Direct materials 780,000
Direct labor 1,540,000
Manufacturing overhead–variable 364,500
Manufacturing overhead–fixed 750,000
Selling expenses–variable 90,000
Selling expenses–fixed 250,000
Administrative expenses–variable 60,000
Administrative expenses–fixed 200,000
Total cost ($4034500)
Profit $465500
Part B)
contribution margin
The contribution margin ratio is the difference between a company's sales and variable expenses, expressed as a percentage.
Sales - VC/sales
=Manufacturing overhead–variable 364,500
Selling expenses–variable 90,000
Administrative expenses–variable 60,000
Direct materials 780,000
Direct labor 1,540,000
Total variable cost = $ 2834500
Contribution margin ration = $450000-$2834500/$450000 =37.01%
Part c) Break even dollar= Fixed Cost / Contribution Margin
Total fixed cost =
Manufacturing overhead–fixed 750,000
Selling expenses–fixed 250,000
Administrative expenses–fixed 200,000
Total = $12,00,000
Break even point = $12,00,000/37.01% = $3242366
we have treated direct material and labour as variable as its increasing decreasing with output.
Part D.
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