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    Calibrated Manufacturing: breakeven, incremental analysis

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    Calibrated Manufacturing makes an electronic component that is in great demand. The component sells for $20 each. Calibrated's current capacity is 10,000 units per week. For the last few months, however, the company has been receiving new orders at a rate of 14,000 units per week, and now has a substantial backlog. The company expects this order rate to continue, if it maintains price. Calibrated's current operating data follows:
    Sales Revenue $200,000
    Variable Costs $100,000
    Fixed Costs $80,000
    Pretax Profit $20,000

    For each incremental addition of 500 units of output weekly, Calibrated would need to purchase new equipment that would add $1,500 to weekly fixed costs.
    No other fixed costs would become incremental for this price change.
    Labor costs currently account for half of all variable costs.
    Additional hires, however, are expected to be more costly than the average of current employees because of their lower productivity.

    Although new hires are paid (wages + fringe benefits) only 80% of the current average, they can produce only two-thirds as much output per hour.

    Consequently, labor costs for additional output with new hires is 20% higher than the current average.
    Calibrated is debating whether to keep its current price and expand to meet the demand or to raise its price to reduce demand somewhat before deciding whether or not to expand.
    1. How much would Calibrated's weekly profits increase if it expanded to meet the entire amount of its current excess demand?

    2. Prepare an analysis of a 10% price increase Calculate the break-even sales quantity (percent and units) Calculate the new $ contribution margin per unit.

    3. What risks might be to Calibrated of increasing price to maximize profit?

    4. What risks might there be to Calibrated of expanding output rather than reducing demand through a price increase?

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    https://brainmass.com/business/finance/calibrated-manufacturing-breakeven-incremental-analysis-513837

    Solution Preview

    Your tutorial is attached in Excel (click in cells to see computations) and shows three different analysis to assist you and mentions two key risks to consider.

    variable material costs $50,000 $5.00
    variable labor costs $50,000 $5.00 < -- 50% of variable is labor
    contribution margin $150,000 $10.00
    fixed costs $80,000
    pretax profit $70,000

    incremental fixed for each 500 units $1,500
    labor costs, proportion of variable costs 50%
    additional ...

    Solution Summary

    Your tutorial is attached in Excel (click in cells to see computations) and shows three different analysis to assist you and mentions two key risks to consider.

    $2.19