Purchase Solution

# Cost Volume Profit Analysis - CompTronics

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Phoenix-based CompTronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 42,000 speaker sets:

Sales ... \$4,032,000
Variable costs ....1,008,000
Fixed costs ...... 2,736,000

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average \$21.60 per set; annual fixed costs are anticipated to be \$2,380,800. (In the following requirements, ignore income taxes.)

Required:

1. Calculate the company's current income and determine the level of dollar sales needed to double
that figure, assuming that manufacturing operations remain in the United States.

2. Determine the break-even point in speaker sets if operations are shifted to Mexico.
Sales Mix and Employee
Compensation; Operating
Changes

3. Assume that management desires to achieve the Mexican break-even point; however, operations
will remain in the United States.

a. If variable costs remain constant, what must management do to fixed costs? By how much
must fixed costs change?
b. If fixed costs remain constant, what must management do to the variable cost per unit? By
how much must unit variable cost change?

4. Determine the impact (increase, decrease, or no effect) of the following operating changes.

a. Effect of an increase in direct material costs on the break-even point.
b. Effect of an increase in fixed administrative costs on the unit contribution margin.
c. Effect of an increase in the unit contribution margin on net income.
d. Effect of a decrease in the number of units sold on the break-even point.

##### Solution Preview

1. Calculate the company's current income and determine the level of dollar sales needed to double
that figure, assuming that manufacturing operations remain in the United States.

Currently, each unit sells for \$4,032,000/42,000, or \$96. The variable cost per unit is \$1,008,000/42,000, or \$24. The current income is:

Sales \$4,032,000
Variable costs 1,008,000
Contribution margin \$3,024,000
Fixed costs 2,736,000
Income \$ 288,000

Doubling income would mean that income would be \$288,000*2, or \$576,000.

Using the formula, units sold=(Fixed costs+Income)/(Unit selling price-unit variable costs), we get:

Units sold=(Fixed costs+Income)/(Unit selling price-unit variable costs)
Units ...

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