QUESTION 1 Splendid Company produces special mobile phones for use on aeroplanes

Question

QUESTION 1 Splendid Company produces special mobile phones for use on aeroplanes. The firm's statement showed the following: Revenues (4,200 units) Variable expenses Contribution margin Fixed expenses Operating income $252,000 051200) $100,800 (70.200) S 30,600 100% 60% 40% An automated machine has been developed that can produce several components of th phones. If the machine is purchased, fixed expenses will increase to $157,500 per firm's production capacity will increase, which is expected to result in a 25 percent in sales volume. It is also estimated that the variable expense ratio will be reduced to hal it is now. Required: (a.) Calculate the firm's current contribution margin per unit and break-even point in un (b.) Calculate the firm's contribution margin per unit and break-even point in terms of u new machine is purchased. (c.) Calculate the firm's operating income assuming that the new machine is purchased. (d.) Do you believe that management of Splendid Company should purchase the new m Explain your answer (25 Mark

Explanation / Answer

(a) Contribution margin = Sales – Variable costs

  Contribution margin Per unit = Contribution margin / units produced

= 10800/4200 = 24

Break Even Point in Units = Fixed Expense / Contribution margin

= 70200 / 24 = 2925

(b) Sales After machine purchased = 252000*(25/100) + 252000 Sales per unit = 4200*(25/100)+4200=5250

= 315000

New Variable Expenses = 315000*(30/100)

= 94500

New Fixed Cost = 70200 + 157500

= 227700

New Contribution margin = Sales – Variable costs

= 315000 - 94500

=220500

Contribution margin per unit =  Contribution margin / units produced

= 220500 / 5250 = 42

Break Even Point in Units = Fixed Expense / Contribution margin

=227700 / 42 = 5421 units

(c) operating income = contribution margin - fixed cost

= 220500 - 227700

operating loss =(7200)

(d) No the managment of splendid Co. should not purchase machinery because this leads to loss of the company by 7200 instead of income of 30600.

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