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# CVP analysis,BEP under two production environment

2-61 CVP in a Modern Manufacturing Company on pg. 87

A division of Hewelett-Packard Company changed its production operations from one where a large labor force assembled electronic components to an automated production facility dominated by computer-controlled robots. The change was necessary because of fierce competitive pressures. Improvements in quality, reliability, and flexibility of production schedules were necessary just to match competition. As a result of the change, variable costs fell and fixed costs increased, as shown in the following assumed budgets:

Old Production Operation Old Production Operation
Unit variable cost
Material \$0.88 \$0.88
Labor \$1.22 0.22
Total per unit \$2.10 \$1.10
Monthly fixed costs
Rent and depreciation 450,000.00 \$875,000.00
Supervisory labor 80,000.00 175,000.00
Other 50,000.00 90,000.00
Total per month \$580,000.00 \$1,140,000.00

Expected volume is 600,000 units per month, with each unit selling for \$3.10 Capacity is 800,000 units.

1. Compute the budgeted profit as the expected volume of 600,000 units under both the old and the new production environments.

2. Compute the budgeted break-even point under both the old and the new production environments.

3 .Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production environments.

4 .Discuss the effect on profits if volume increases to 700,000 units under both the old and the new production environments.

5 .Comment on the riskiness of the new operation versus the old operation.

#### Solution Preview

See Excel attached.

Answer to question no: 1

1. Compute the budgeted profit as the expected volume of 600,000 units under both the old and the new production environments.
per unit total-old per unit total new
sales 3.1 1860000 3.1 1860000
less:variable cost 2.1 1260000 1.1 660000
contribution 1 600000 2 1200000
less:fixed cost 580000 1140000
profit 20000 60000
pv ratio 0.322580645 0.64516129

2. Compute the bugdeted ...

#### Solution Summary

The annswer contains computation of PV ratio, Break even point under two production environments and the computation of profit under different production volume

\$2.19