Phoenix-based CompTronics manufactures audio speakers for desktop computers. The
ID: 2491556 • Letter: P
Question
Phoenix-based CompTronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 43,000 speaker sets:
Sales $ 3,612,000
Variable costs 903,000
Fixed costs 2,250,000
Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $16.00 per set; annual fixed costs are anticipated to be $1,992,000. (In the following requirements, ignore income taxes.)
2. Determine the break-even point in speaker sets if operations are shifted to Mexico. (Do not round intermediate calculations and round your final answer up to nearest whole number.)
Breakeven point_____units?
3. Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.
a. If variable costs remain constant, by how much must fixed costs change? (Round your final answer to nearest whole dollar.)
Fixed costs_____by_____?
b. If fixed costs remain constant, by how much must unit variable cost change? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Variable costs_____by_____per unit?
Explanation / Answer
2.
Sales amount for 43,000 speaker sets = $3,612,000
Selling price per speaker set = $3,612,000/43,000 = $84 per set
Variable cost per speaker set = $16 per set
Contribution margin per speaker set = Selling price – Variable cost = $84 - $16 = $68 per set
Fixed costs = $1,992,000
Breakeven point in speaker sets = Fixed costs/Contribution margin per speaker set = $1,992,000/$68 = 29,294.12 i.e. 29,294 speaker sets
3.
Variable costs at United States for 43,000 speaker sets = $903,000
Variable cost per speaker set = $903,000/43,000 = $21 per set
Contribution margin per speaker set = $84 - $21 = $63 per set
Contribution margin for 29,294 speaker sets = $63 * 29,294 = $1,845,522
At breakeven units, fixed cost is equal to Contribution margin.
Hence, revised fixed costs = $1,845,522
Decrease in fixed costs = $2,250,000 - $1,845,522 = $404,478
4.
Fixed costs = $2,250,000
Desired contribution margin at breakeven level = Fixed costs = $2,250,000
Contribution margin per speaker set = $2,250,000/29,294 sets = $76.81
Revised variable cost per speaker set =Selling price – Contribution margin per set = $84 - $76.81 = $7.19
Decrease in variable cost = $21 - $7.19 = $13.81 per speaker set