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CVP Ananlysis

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Brazen, Inc. produces sound amplifiers for electric guitars. The firm's income statement showed the following:

Revenues (8,400 units) $504,000 100%
Variable expenses (302,400) 60%
Contribution margin $201,600 40%
Fixed expenses (140,400)
Operating income $61,200

An automated machine has been developed that can produce several components of the amplifiers. If the machine is purchased, fixed expenses will increase to $315,000 per year. The firm's production capacity will increase, which is expected to result in a 25 percent increase in sales volume. It is also estimated that the variable expense ratio will be reduced to half of what it is now.

I need to find out how to get these three calculations:

(a.) Calculate the firm's current contribution margin per unit and break-even point in units.
(b.) Calculate the firm's contribution margin per unit and break-even point in terms of units if the new machine is purchased.
(c.) Calculate the firm's operating income assuming that the new machine is purchased.

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Solution:

(a.) Calculate the firm's current contribution margin per unit and break-even point in units.
Contribution Margin per unit=(201600)/8400=$24
Break even point (Unit)=Fixed cost/CM per unit=140400/24=5850 units

(b.) Calculate the firm's ...

Solution Summary

Solution describes the steps to calculate contribution margin and breakeven point in both the cases. It also calculates firm's operating income if new machine is purchased.

$2.19
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CVP Analysis

Zan Azlett and Angela Zesiger have joined forces to start A&Z Lettuce Products, a processor of packaged shredded lettuce for institutional use. Zan has years of food processing experience, and Angela has extensive commercial food preparation experience. The process will consist of opening crates of lettuce and then sorting, washing, slicing, preserving and finally packaging the prepared lettuce. Together, with help from vendors, they feel they can adequately estimate demand, fixed costs, revenues and variable cost per five-pound bag of lettuce. They think a largely manual process will have monthly fixed costs of $37,500 and variable costs of $1.75 per bag. A more mechanized process will have fixed costs of $75,000 per month with variable costs of $1.25 per five-pound bag. They expect to sell the shredded lettuce for $2.50 per five-pound bag.

(a) What is the break-even quantity for the manual process?
(b) What is the revenue at the break-even quantity for the mechanized process?
(c) What is the break-even quantity for the mechanized process?
(d) What is the revenue at the break-even quantity?
(e) What is the monthly profit or loss of the manual process if they expect to sell 60,000 bags of lettuce per month?
(f) What is the monthly profit or loss of the mechanized process if they expect to sell 60,000 bags of lettuce per month?
(g) At what quantity would Zan and Angela be indifferent to the process selected?
(h) Over what range of demand would the manual process be preferred over the mechanized process? Over what range of demand would the mechanized process be preferred over the manual process?

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