Question

Yacca Limited has prepared the following profit analysis, for the current financial year:

Sales (150,000 units). $1,275,000

Variable expenses. $712,500

Contribution margin. $562,500

Fixed expenses $252,000

Profit. $310,500

Management are considering a range of options to improve profitability. These options include reducing the selling price by $0.15 per

unit and updating machinery and production methods. If machinery and production methods are updated, fixed expenses will

increase by $72,000 per year and variable expenses will decrease by $1.40 per unit. However, management are concerned at the

increased risk from changes to the level of operating gearing. If the selling price is reduced by $0.15 per unit, the number of units sold

is expected to increase by 5%. There is no reason why management cannot reduce the selling price and update machinery and

production at the same time.

Required:

a)

Calculate the contribution margin per unit, total fixed costs, the breakeven point in units, and total expected

profit for all of the possible choices that management can make. Present the results of your calculations in a

table. Do not include formulas in your write-up.

b)Complete the following table, showing expected profit at various sales levels for (i) the current state of

operations (no changes) and (ii) the case where machinery and production methods are updated:

Sales (units) 0 50,000 100,000 150,000 200,000

Expected profit (no

change)

Expected profit

(machinery &

production methods

updated)

Answer 1