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Studying effects of change in cost structure

Ozark, Inc. produces small-scale replicas of vintage automobiles for collectors and museums. Finished products are built on a 1/20th scale of originals. The firm's income statement showed the following:

Revenue (2,400 units) $1,584,000
Variable expenses 871,200
Contribution margin 712800
Fixed expenses 520,000
Operating income 192,800

An automated stamping machine has been developed that can efficiently produce body frames, hoods, and doors to the desired scale. If the machine is leased, fixed expenses will increase by $58,000 per year. The firm's production capacity will increase, which is expected to result in a 25% increase in sales volume. It is also estimated that labor cost of $33 per unit could be saved because less polishing and finishing time will be required.

A.Calculate the firm's current contribution margin ratio and break even point in terms of revenues (round your answer)
B.Calculate the firm's contribution margin ratio and break-even point in terms of revenues if the new machine is leased.
C.Calculate the firm's operating income assuming that the new machine is leased.
D.Do you believe that management of Ozark, Inc., should lease the new machine? Explain your answer.

Solution Preview

A. Calculate the firm's current contribution margin ratio and break even point in terms of revenues (round your answer)
Current contribution ratio=current contribution margin/current level of total revenue
=712800/1584000
=45.00%
Current Breakeven point (Revenue) =Current Fixed expenses/CM ratio
=520000/45%
=$1,155,556 ...

Solution Summary

Solution describes the steps to calculate breakeven point with current cost structure and with cost structure after machine is leased. It also studies whether machine should be leased or not.

$2.19