Calculate The Company’s Current Income And Determine The Lev ✓ Solved

Calculate The Company’s Current Income And Determine The Level

Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States.

Determine the break-even point when speaker sets operations are shifted to Mexico.

Assuming management desires to achieve the Mexican break-even point while operations remain in the United States:

• If variable costs remain constant, what must management do to fixed costs? How much must fixed costs change?
• If fixed costs remain constant, what must management do to the variable cost per unit? By how much must the unit variable cost change?

Determine the impact (increase, decrease, or no effect) of the following operational changes:

• The effect of an increase in direct material costs on the break-even point.
• The effect of an increase in fixed administrative costs on the unit contribution margin.
• The effect of an increase in the unit contribution margin on net income.
• The effect of a decrease in the number of units sold on the break-even point.

Sample Paper For Above instruction

Cost-volume-profit (CVP) analysis is an essential managerial accounting tool that assists managers in understanding the relationships among costs, sales volume, and profit. This paper explores a series of scenarios that involve calculating current income, break-even points, and the effects of operational and environmental changes on profitability and cost structure. By analyzing these factors, managers can formulate strategic decisions to enhance financial performance.

Firstly, to calculate the current income of the company, we need to analyze the contribution margin approach. Assume the company sells a certain number of units at a given selling price, with variable and fixed costs known. The current income can be determined as the total contribution margin minus total fixed costs. If the goal is to double the current income, the required sales level in dollar terms can be calculated using the contribution margin ratio (CMR). Specifically, using the formula:

Required Sales = (Current Income * 2 + Fixed Costs) / CMR

This calculation ensures that sales increase sufficiently to generate twice the current profit while covering fixed and variable costs.

Secondly, when operations are shifted to Mexico, understanding the break-even point becomes crucial. The break-even sales volume in units is calculated by dividing total fixed costs by the contribution margin per unit. A shift in operations to Mexico likely involves changes in fixed costs and possibly variable costs. Thus, the break-even point in dollars can be recalculated based on the new cost structure. This exercise highlights the importance of assessing how operational location impacts cost behavior and overall profitability.

Next, considering the scenario where management aims to reach the Mexican break-even point while keeping operations in the United States, specific adjustments are needed. If variable costs remain constant, management must focus on fixed costs. An increase in fixed costs would directly increase the break-even point in dollar sales, so to reach the new break-even point, fixed costs must be reduced by the extent equal to the increase caused by the operational shift or by improving sales volume. Conversely, if fixed costs remain unchanged, the only alternative to raise profitability involves reducing the variable cost per unit. This would require managerial efforts to negotiate better supplier terms or improve operational efficiencies, decreasing the unit variable cost and thereby lowering the contribution margin per unit, which directly influences break-even sales volume.

The analysis further extends to understanding the impact of different operational changes:

• An increase in direct material costs will increase variable costs per unit, raising the break-even point since each unit contributed less profit. Specifically, an increase in material costs decreases the contribution margin, thus requiring higher sales volume to reach breakeven.
• An increase in fixed administrative costs reduces overall profitability by increasing the fixed cost component, though it does not affect the contribution margin per unit. This results in a higher break-even sales volume.
• Enhancing the unit contribution margin through better pricing strategies or cost reductions will increase net income, demonstrating the importance of maximizing contribution margins for profitability.
• A decrease in units sold will elevate the break-even point in sales dollar terms if fixed costs are unchanged, as fewer units mean less total contribution margin, emphasizing the vulnerability of profit to sales volume fluctuations.

In conclusion, CVP analysis offers valuable insights into how operational and environmental factors influence a company's profitability. Strategic adjustments in fixed and variable costs, as well as sales volume management, can significantly impact the company's ability to meet its financial objectives. Managers must consider these dynamics carefully to maintain and improve competitive advantage in a fluctuating market environment.

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