E-Z Seats manufactures swivel seats for customized vans. It currently manufactur
ID: 2535634 • Letter: E
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)
(c)
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
a) E-Z Seats
CVP Income Statement (Amounts in $)
b) Contribution Margin per seat = Selling Price per seat - Variable costs per seat
= $520 per seat - $240 per seat = $280 per seat
Contribution Margin Ratio = Contribution Margin per seat/Selling Price per seat
= $280/$520 = 53.85%
Break Even Point in Dollars = Fixed Costs/Contribution Margin Ratio
= $1,600,000/53.85% = $2,971,216
Margin of Safety Sales = Total Sales - Break Even Sales
= $4,160,000 - $2,971,216 = $1,188,784
Margin of Safety Ratio = Margin of Safety Sales/Total Sales
= $1,188,784/$4,160,000 = 28.58%
Degree of Operating Leverage = Contribution Margin/Net Income
= $2,240,000/$640,000 = 3.50
c) E-Z Seats
CVP Income Statement (Amounts in $)
Sales (8,000 seats*$520 per seat) 4,160,000 Less: Variable Costs (8,000 seats*$240 per seat) (1,920,000) Contribution Margin 2,240,000 Less: Fixed Costs (1,600,000) Net Income/(Loss) 640,000Related Questions
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