Question

Beacon Company is considering automating its production facility. The initial investment in automation would be $9.60 million, and the equipment has a useful life of 8 years with a residual value of $1,120,000. The company will use straight-line depreciation. Beacon could expect a production increase of 38,000 units per year and a reduction of 20 percent in the labor cost per unit.

	Current (no automation)			Proposed (automation)
	77,000 units			115,000 units
Production and sales volume	Per Unit		Total	Per Unit		Total
Sales revenue	$	93	$ ?	$	93	$ ?
Variable costs
Direct materials	$	16		$	16
Direct labor		20			?
Variable manufacturing overhead		11			11
Total variable manufacturing costs		47			?
Contribution margin	$	46	?	$	50	?
Fixed manufacturing costs			$ 1,090,000			$ 2,290,000
Net operating income			?			?

PA11-2 Part 1

Required:
1-a. Complete the following table showing the totals. (Enter your answers in whole dollars, not in millions.)

Answer 1

Calculate following

	Current (no automation)			Proposed (automation)
	77,000 units			115,000 units
Production and sales volume	Per Unit		Total	Per Unit		Total
Sales revenue	$	93	$7161000	$	93	$10695000
Variable costs
Direct materials	$	16		$	16
Direct labor		20			20*80% = 16
Variable manufacturing overhead		11			11
Total variable manufacturing costs		47			43
Contribution margin	$	46	3542000	$	50	5750000
Fixed manufacturing costs			$ 1,090,000			$ 2,290,000
Net operating income			2452000			3460000