Question

We are currently producing Product Z using a very labor-intensive method.  The selling price of Product Z is $30 per unit, the variable expenses are $19.60 per unit, and the fixed expenses are $1,820,000 per year. I am wondering if it wouldn’t be better for us to automate the process for Product Z.  If we do, the variable expenses will drop to $16.00 per unit but the fixed expenses will increase to $2,940,000 per year.  The selling price will remain unchanged at $30 per unit.

1. Calculate the break-even point in units and dollars for both methods.

2. Prepare a contribution format income statement for each method assuming we will sell 250,000 units.

3. Using the information in part 3, calculate the margin of safety for both methods.  I would like the margin of safety in units, dollars, and percentage form.

4. Using the information in part 3, calculate the degree of operating leverage for both methods.

Answer 1

thanks