E-Z Seats manufactures swivel seats for customized vans. It currently manufactur

Question

E-Z Seats manufactures swivel seats for customized vans. It currently manufactures 8,000 seats per year, which it sells for $520 per seat. It incurs variable costs of $240 per seat and fixed costs of $1,600,000. It is considering automating the upholstery process, which is now largely manual. It estimates that if it does so, its fixed costs will be $2,400,000, and its variable costs will decline to $100 per seat.

With the class divided into groups, answer the following questions.

(a)

(b)

E-Z Seats manufactures swivel seats for customized vans. It currently manufactures 8,000 seats per year, which it sells for $520 per seat. It incurs variable costs of $240 per seat and fixed costs of $1,600,000. It is considering automating the upholstery process, which is now largely manual. It estimates that if it does so, its fixed costs will be $2,400,000, and its variable costs will decline to $100 per seat.

With the class divided into groups, answer the following questions.

Explanation / Answer

SOLUTION

(A) CVP Income statement

(B) Contribution margin ratio = Contribution / Sales * 100

= $2,240,000 / $4,160,000 * 100

= 53.85%

Breakeven point in dollars = Fixed costs / Contribution margin ratio

= $1,600,000 / 53.85% = $2,971,216

Margin of safety = (Actual sales - Breakeven sales) / Actual sales

= ($4,160,000 - $2,971,216) / $4,160,000

= 28.58%

Particulars Amount ($) Sales (8,000 * $520) 4,160,000 Less: Variable Cost (8,000 * $240) (1,920,000) Contribution margin 2,240,000 Less: Fixed expenses (1,600,000) Net income 640,000

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