| Tracey Corporation has decided to introduce a new product. The product can be | |||||||||
| manufactured using either an automated-intensive or labor-intensive method. The | |||||||||
| manufacturing method will not affect the quality or sales of the product. The estimated | |||||||||
| costs of the two methods are as follows: | |||||||||
| Automated- | Labor- | ||||||||
| intensive | intensive | ||||||||
| Variable expenses | $16.00 | per unit | $19.60 | per unit | |||||
| Fixed expenses | $2,940,000 | $1,820,000 | |||||||
| The company’s market research department has recommended an introductory selling price of | |||||||||
| $30 per unit for the new product. | |||||||||
| Required | |||||||||
| a. | Calculate the break-even point in units and dollars for BOTH methods. | ||||||||
| b. | Determine the unit sales volume at which the net operating income is the same for | ||||||||
| the two manufacturing methods. (HINT: take the difference in the fixed expenses | |||||||||
| and divide by the difference in the contribution margins. It doesn’t come out even | |||||||||
| so don’t panic.) | |||||||||
| c. | Assume that the company expects to sell 250,000 units. Prepare two contribution format | ||||||||
| income statements, one assuming that products are manufactured using the automated- | |||||||||
| intensive method and one assuming that products are manufactured using the labor- | |||||||||
| intensive method. Put your answers on the template provided on the next page. | |||||||||
| Automated-Intensive | In Total | Per Unit | |||||||
| Sales (250,000 units) | |||||||||
| Less variable expenses | |||||||||
| Contribution margin | |||||||||
| Less fixed expenses | |||||||||
| Net operating income | |||||||||
| Labor-Intensive | In Total | Per Unit | |||||||
| Sales (250,000 units) | |||||||||
| Less variable expenses | |||||||||
| Contribution margin | |||||||||
| Less fixed expenses | |||||||||
| Net operating income | |||||||||
| d. | Using the information in part (c), what is the margin of safety (units, dollars, and percentage) | ||||||||
| for BOTH methods? | |||||||||
| e. | Using the information in part (c), what is the degree of operating leverage for | ||||||||
| BOTH methods? | |||||||||
| f. | What is your recommendation to management concerning which manufacturing | ||||||||
| method should be used? A really great answer will address each of the things | |||||||||
| in steps (a) through (e). | |||||||||
C
ScholarMatic: Explanation & Answer
Your ready answer from a verified tutor is just a click away for as little as $14.99
Click Order Now to get 100% Original Answer Customized to your instructions!
