Walton Ltd. is considering replacing an existing machine with a new and faster m
ID: 2489737 • Letter: W
Question
Walton Ltd. is considering replacing an existing machine with a new and faster machine that will produce a more reliable product (i.e.; better tolerances). The switch to a new machine resulting in a superior product is expected to allow Walton to increase its sale price for the product. The switch will increase fixed costs, but not the variable costs. The cost and revenue estimates are as follows: Required: Determine the break-even point in units for the two machines. (Round your answers to the nearest whole number.) Determine in units the sales level at which the new machine will achieve a 10 percentage target profit-to-sales ratio (ignore taxes). (Do not round intermediate calculations.) Determine the sales level at which profits will be the same for either the old or the new machine. (Round intermediate calculations to 4 decimal places and final answers to the nearest whole number.)Explanation / Answer
1
Calculation of breakeven point in units for both Machines:
Old Machine
New Machine
Monthly fixed costs (A)
$ 310,000
$ 690,000
Selling Price per unit
$ 44
$ 50
Variable cost per unit
$ (33)
$ (35)
Contribution Margin epr unit (B)
$ 11
$ 15
Breakeven point in units = A/B =
28,182
46,000
2
Calculation Breakeven sales in units for new machine to achieve target profits:
Assuming breakeven units =X
New Machine
Monthly fixed costs
$ 690,000
Add: Target profit to sales ( Sales units * Selling Price * 10%)
X *5
(X *50*10%)
Sum of Fixed costs and target profit
X *5 + 690000
Selling Price per unit
$ 50
Variable cost per unit
$ (35)
Contribution Margin per unit (B)
$ 15
Total contribution = X *15
X *15
For breakeven point total contribution margin should be equal to sum of Fixed costs and target profit
Hence,
X *15 = X *5 + 690000
X *15 - X *5 = 690000
X *10= 690000
X = 690000 /10 =
69000 Units
Hence Breakeven sales in units for new machine to achieve target profits = 69,000 Units
1
Calculation of breakeven point in units for both Machines:
Old Machine
New Machine
Monthly fixed costs (A)
$ 310,000
$ 690,000
Selling Price per unit
$ 44
$ 50
Variable cost per unit
$ (33)
$ (35)
Contribution Margin epr unit (B)
$ 11
$ 15
Breakeven point in units = A/B =
28,182
46,000
2
Calculation Breakeven sales in units for new machine to achieve target profits:
Assuming breakeven units =X
New Machine
Monthly fixed costs
$ 690,000
Add: Target profit to sales ( Sales units * Selling Price * 10%)
X *5
(X *50*10%)
Sum of Fixed costs and target profit
X *5 + 690000
Selling Price per unit
$ 50
Variable cost per unit
$ (35)
Contribution Margin per unit (B)
$ 15
Total contribution = X *15
X *15
For breakeven point total contribution margin should be equal to sum of Fixed costs and target profit
Hence,
X *15 = X *5 + 690000
X *15 - X *5 = 690000
X *10= 690000
X = 690000 /10 =
69000 Units
Hence Breakeven sales in units for new machine to achieve target profits = 69,000 Units
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