CVP computations. Garrett Manufacturing sold 410,000 units of its product for $6
ID: 2816275 • Letter: C
Question
CVP computations. Garrett Manufacturing sold 410,000 units of its product for $68 per unit in 2017. Variable cost per unit is $60, and total fixed costs are $1,640,000.
Required:
1. Calculate (a) contribution margin and (b) operating income.
2. Garrett’s current manufacturing process is labor intensive. Kate Schoenen, Garrett’s production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to $5,330,000. The variable costs are expected to decrease to $54 per unit. Garrett expects to maintain the same sales volume and selling price next year. How would acceptance of Schoenen’s proposal affect your answers to (a) and (b) in requirement 1?
3. Should Garrett accept Schoenen’s proposal? Explain.
Explanation / Answer
Solution: 1a) Calculation of Contribution Margin: Sales $ 27880000 (410000*$68) Less: Variable Costs $ 24600000 (410000*$60) Contribution Margin $ 3280000 Contribution Margin = $3280000 1b) Calculation of Operating Income: Sales $ 27880000 (410000*$68) Less: Variable Costs $ 24600000 (410000*$60) Contribution Margin $ 3280000 Fixed Costs $ 1640000 Operating Income $ 1640000 2a) Calculation of Contribution Margin: Sales $ 27880000 (410000*$68) Less: Variable Costs $ 22140000 (410000*$54) Contribution Margin $ 5740000 Contribution Margin = $5740000 2b) Calculation of Operating Income: Sales $ 27880000 (410000*$68) Less: Variable Costs $ 22140000 (410000*$54) Contribution Margin $ 5740000 Fixed Costs $ 5330000 Operating Income $ 410000 3) Operating Income would Decrease if Schoenen is accepted by $1230000 ($1640000-$410000) The companies Fixed Cost would increase which would result in increase of operating leverage and risk