The following monthly data in contribution format are available for the MN Company and its only product, Product SD:
Total Per Unit
Sales $83,700 $279
Variable expenses 32,700 109
Contribution margin 51,000 $170
Fixed expenses 40,000
Net operating income $11,000
The company produced and sold 300 units during the month and had no beginning or ending inventories.
a. What is the total contribution margin at the break-even point?
b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SD. This change would reduce variable expenses by $18 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 250 units per month. Should this change be made?
c. Assume that MN Company is currently selling 300 units of Product SD per month. Management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50 percent. Should these changes be made?
d. Assume that MN Company is currently selling 300 units of Product SD. Management wants to automate a portion of the production process for Product SD. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SD thus resulting in an increase in monthly sales of 12%. Should these changes be made?
e. List at least three different things that you can do with CVP information. Also, give two of the standard assumptions made when using CVP.
Excel file contains calculations of BEP, effect on net income and the standard assumptions made when using CVP.