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Rosario Company, located in Buenos Aires, Argentina, manufactures a component used in farm machinery. The company's fixed costs are 3,500,000 pesos per year. The variable cost of each component is 1,400 pesos, and the components are sold for 3,300 pesos each. Last year, the company sold 5,000 components. The peso's value on the day of the exercise was 0.327 USD. Ignore income taxes in the calculations.

Using this information, answer the following requirements: calculate the break-even point in units, determine the new break-even point after a 15% increase in fixed costs, find the company's prior year's net income, and evaluate the new break-even point if the sales price is reduced to 2,800 pesos with an expected increase of 1,800 units sold. Provide all answers rounded to the nearest whole number or appropriate figures.

Paper For Above instruction

The Rosario Company operates within a competitive farm machinery component market in Argentina, where understanding the concepts of cost-volume-profit (CVP) analysis is vital for strategic decision-making. CVP analysis helps in determining the break-even point, assessing impact of cost and price changes, and planning sales strategies to ensure profitability. This discussion explores these aspects based on the company's recent historical data and hypothetical scenarios.

Break-Even Analysis

The initial step involves calculating the break-even point in units, which occurs when total revenues equal total costs. The selling price per unit is 3,300 pesos, and variable costs are 1,400 pesos per unit, while fixed costs are 3,500,000 pesos annually. The contribution margin per unit is derived as:

Contribution Margin per Unit = Selling Price - Variable Cost = 3,300 - 1,400 = 1,900 pesos

Break-even point in units = Fixed Costs / Contribution Margin per Unit = 3,500,000 / 1,900 ≈ 1842.11 units

Therefore, the company must sell approximately 1,842 units to cover all fixed and variable costs, rounding to the nearest whole number.

Impact of Increase in Fixed Costs

If fixed costs increase by 15%, new fixed costs become:

New Fixed Costs = 3,500,000 × 1.15 = 4,025,000 pesos

The revised break-even point in units is:

New Break-even Units = 4,025,000 / 1,900 ≈ 2,119 units

This indicates Rosario Company needs to sell approximately 2,119 units to break even with the increased fixed costs, assuming unchanged price and variable costs.

Net Income for the Prior Year

To determine last year's net income, first calculate total revenue and total variable costs:

Total Revenue = Units Sold × Selling Price = 5,000 × 3,300 = 16,500,000 pesos

Total Variable Costs = Units Sold × Variable Cost = 5,000 × 1,400 = 7,000,000 pesos

Total Contribution Margin = Total Revenue - Total Variable Costs = 16,500,000 - 7,000,000 = 9,500,000 pesos

Net Income = Total Contribution Margin - Fixed Costs = 9,500,000 - 3,500,000 = 6,000,000 pesos

Break-Even Point After Price Reduction and Increased Sales

If the sales price decreases to 2,800 pesos and sales are expected to increase by 1,800 units, the new total units sold would be:

Projected Units Sold = 5,000 + 1,800 = 6,800 units

The new contribution margin per unit is:

New Contribution Margin = 2,800 - 1,400 = 1,400 pesos

The adjusted break-even point in units is calculated as:

Break-even Units = Fixed Costs / New Contribution Margin = 3,500,000 / 1,400 ≈ 2,500 units

This suggests Rosario needs to sell approximately 2,500 units at the reduced price to break even, given the fixed costs and variable cost structure.

Conclusion

The analysis of Rosario Company's cost structure and sales strategy highlights the importance of maintaining a balance between selling prices and cost management to ensure profitability. Increase in fixed costs significantly raises the break-even point, necessitating higher sales volume. Price reductions, while potentially increasing sales volume, require careful calculation to ensure they do not adversely affect profitability. Overall, strategic planning rooted in CVP analysis can guide Rosario in optimizing its operations amidst changing costs and market conditions.

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