Question

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $56,000 each month.a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales.b. Assume that the company expects to sell 20,500 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.)c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,500)

Answer 1

Answer:

Question is solved in detail in the explanation section.

Explanation:

Note: Original data is missing in this question, but I have found that data somewhere on the internet and will be using that to solve this question. I will be using the missing data. Will solve this question for the sack of understanding the concept. So we have to neglect the data in this question and use the one that I have found. Thank you for your understanding.

Solution:

Data given:

CM Ratio = $Value of Price - \frac{\frac{value of Variable expense}{value of sales} - Value of decreasing variable expense }{value of price}$

Value of Price = $30 per unit

Value of Variable Expense = $409500

Value of decreasing variable expense = $3

Value of Sales = $19500

Now, we have all the values to solve for CM Ratio, so just plugging in the values we get:

CM Ratio = $30 - \frac{\frac{409500}{19500} - 3 }{30}$

CM Ratio  = 0.40

CM Ratio = 40%

Now, in order to find out the value of break even sales, we need:

Value of fixed expense

CM Ratio that we just calculated.

From the original data:

value of fixed expense = $180000

It is given that,

value of fixed expense would increase by $72000 each month.

So  the new fixed expense would be = $180000 + $72000

Value of Fixed expense = 252000

So, the break even sales value will be:

Break Even Sales = Value of Fixed Expense/ CM Ratio

CM Ratio = 40%

Break Even Sales Value  = $252000/0.40

Break Even Sales Value =  $630000

Now, for Break even sales unit, formula is:

Break even sales unit = Value of Fixed Expense/ CM Ratio x Price of a Unit

Break even sales unit = 252000/40% x 30

Break even sales unit = 21000

b) Contribution Format income statement:

Contribution income statement is attached in the attachment below.      

Refer to the attachment.

c)

Recommendation:

Well, according to the original data through which this question has solve, we would recommend the company to go for non-automated operations because:

1. Automated operations have higher contribution margin.

2. The Fixed cost of automated operations is greater than the non-automated operations.

3. Additionally, the automated operations have greater break even sales, which is a risk. If company reaches a break even sales of the values equal to the break even sales values of the non-automated operations then, company will definitely bear loss.

Hence, it is recommended that company should not go for automation of its operation.

Note: As this question lacks original data, so we couldn't solve the question according to the sub-data that is given in this question. So, I have solved it using the original data as a whole. Now, using the same concept, you can solve such type of questions no matter what the data is.

Thank you for your understanding.