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CVP Analysis

Problem 1: Hess Co. manufactures a product that sells for $12 per unit. Total fixed costs are $96,000 and variable costs are $7 per unit. Hess can buy a newer production machine that will increase total fixed costs by $22,800 but variable costs will be decreased by $0.40 per unit. What effect would the purchase of the new machine have on Hess's break-even point in units? Show calculations.

Problem 2: Kelley Company and Mason Company each have sales of $200,000 and costs of $140,000. Kelley Company's costs consist of $40,000 fixed and $100,000 variable, while Mason Company's costs consist of $100,000 fixed and $40,000 variable. Which company will suffer the greatest decline in profits if sales volume declines by 15%? Show calculations.

Solution Preview

Problem 1: Hess Co. manufactures a product that sells for $12 per unit. Total fixed costs are $96,000 and variable costs are $7 per unit. Hess can buy a newer production machine that will increase total fixed costs by $22,800 but variable costs will be decreased by $0.40 per unit. What effect would the purchase of the new machine have on Hess's break-even point in units? Show calculations.

Current scenario
Price of product=P=$12
Total Fixed Costs=F=$96000
Variable Cost per unit=V=$7
Break Even point =F/(P-V)=96000/(12-7)= 19200 units

If the ...

Solution Summary

There are two problems. Solution to first problem analyzes the effect of purchase of a new machine on break even point. Solution to second problem compares the effect of decline in sales on profits of two companies with different cost structures.

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