Problem 2 involves a fixed asset decision. FACTS: 1. Elliott Incorporated manufa

Question

Problem 2 involves a fixed asset decision. FACTS: 1. Elliott Incorporated manufactures garden tools and the manufacturing equipment is perfectly functional but 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 is 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 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 proposed equipment upgrade e. Compute contribution margin ratio based on proposed equipment upgrade f. Compute breakeven dollars for current production g. Should Elliott proceed with the proposed upgrade? Elliott Incorporated CVP for current production Sales         Variable manufacturing cost         Variable selling cost         Variable administrative cost                              -   Contribution Margin #VALUE!     Fixed manufacturing cost         Fixed selling cost         Fixed administrative cost                              -   Net income #VALUE! Contribution margin ratio: contribution margin / sales #VALUE! Break even dollars: fixed cost $ / contribution margin % #VALUE! Elliott Incorporated CVP with equipment upgrade Sales           6,000,000     Direct labor #VALUE!     Direct materials #VALUE!     Variable manufacturing overhead #VALUE!     Variable selling cost #VALUE!     Variable administrative cost #VALUE! #VALUE! Contribution Margin #VALUE!     Fixed manufacturing cost              2,250,000     Fixed selling cost         Fixed administrative cost               2,250,000 Net income #VALUE! Contribution margin ratio: contribution margin / sales #VALUE! Break even dollars: fixed cost $ / contribution margin % #VALUE! Should they do it? Problem 2 involves a fixed asset decision. FACTS: 1. Elliott Incorporated manufactures garden tools and the manufacturing equipment is perfectly functional but 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 is 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 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 proposed equipment upgrade e. Compute contribution margin ratio based on proposed equipment upgrade f. Compute breakeven dollars for current production g. Should Elliott proceed with the proposed upgrade? Elliott Incorporated CVP for current production Sales         Variable manufacturing cost         Variable selling cost         Variable administrative cost                              -   Contribution Margin #VALUE!     Fixed manufacturing cost         Fixed selling cost         Fixed administrative cost                              -   Net income #VALUE! Contribution margin ratio: contribution margin / sales #VALUE! Break even dollars: fixed cost $ / contribution margin % #VALUE! Elliott Incorporated CVP with equipment upgrade Sales           6,000,000     Direct labor #VALUE!     Direct materials #VALUE!     Variable manufacturing overhead #VALUE!     Variable selling cost #VALUE!     Variable administrative cost #VALUE! #VALUE! Contribution Margin #VALUE!     Fixed manufacturing cost              2,250,000     Fixed selling cost         Fixed administrative cost               2,250,000 Net income #VALUE! Contribution margin ratio: contribution margin / sales #VALUE! Break even dollars: fixed cost $ / contribution margin % #VALUE! Should they do it?

Explanation / Answer

Elliott Incorporated All Amounts in $ CVP for current production Sales 45,00,000 Direct materials 7,80,000 Direct labor 15,40,000     Variable manufacturing cost 3,64,500     Variable selling cost 90,000     Variable administrative cost 60,000 28,34,500 Contribution Margin 16,65,500     Fixed manufacturing cost 7,50,000     Fixed selling cost 2,50,000     Fixed administrative cost 2,00,000 12,00,000 Net income 4,65,500 Contribution margin ratio: contribution margin / sales 37.01% Break even dollars: fixed cost $ / contribution margin % 3242269.59 Elliott Incorporated CVP with equipment upgrade Sales 6000000     Direct labor 623880 % of sales in original table is 17.33%, assumed to be on the same level     Direct materials 2053200 % of sales in original table is 34.22%, assumed to be on the same level     Variable manufacturing overhead 291600 % of sales in original table is 8.1%, assumed to be on the same level     Variable selling cost 120000 % of sales in original table is 2%, assumed to be on the same level     Variable administrative cost 79800 3168480 % of sales in original table is 1.33%, assumed to be on the same level Contribution Margin 2831520     Fixed manufacturing cost 22,50,000     Fixed selling cost 2,50,000     Fixed administrative cost 2,00,000 27,00,000 Net income 1,31,520 Contribution margin ratio: contribution margin / sales 47.19% Break even dollars: fixed cost $ / contribution margin % 5721308.7 Should they do it? Yes, they should do it as the Contribution Margin and consequently, the Breakeven point also increases, through an increase in turnover to $ 6,000,000..

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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