1 answer

We were unable to transcribe this image9) New Plant? Because TrueBeat's capacity is limited to 8,000...

Question:

9) New Plant? Because TrueBeats capacity is limited to 8,000 units in their current production facility, management would li

We were unable to transcribe this image
9) New Plant? Because TrueBeat's capacity is limited to 8,000 units in their current production facility, management would like to explore the impact of building a new production facility. The company is considering a new production facility and equipment that will decrease their variable expenses by 30% but increase fixed expenses by 50%. TrueBeat still plans to produce and sell the same number of units in Year 4 (base). The new plant will give them a relevant range of 5,000 to 12,000 units. a) If the new production facility is built, what would be the company's new () contribution margin per unit, (ii) fixed expenses and (iii) the new profit formula? Complete the table below. 5 i) New CM per unit ii) New Fixed expenses iii) New profit formula + Under New production facility New Break-even New Year 4 6,000 Units Sales Revenue NOI -0- b) Assume TrueBeat sells the same units as planned for Year 4 in the new plant, calculate the new margin of safety in (i) units) (ii) dollars and (iii) percent. i) MoS units ii) MoS dollars iii) MoS percent Has margin of safety improved or declined? Explain/comment in 10 to 30 words. c) Calculate the degree of operating leverage. Has operating leverage improved or declined from the "base" calculation in 9)? Discuss in 10 to 30 words. d) Conclusion: If you were a member of top management, would you have been in favor of constructing the new plant? Explain in 30 to 50 words

Answers

Based on the information provided, the contribution margin income statement for TrueBeat’s total production and sales of 1,000 drum sets will be as follows:

Contribution income statement

Per unit

Total

Sales

$553

$553,000

Less: Variable costs

Plastic for casing

$21

$21,000

Wages of assembly workers

$82

$82,000

Drum stands

$40

$40,000

Sales commission

$18

$18,000

Total variable costs

$161

$161,000

Contribution margin

$392

$392,000

Less: Fixed costs

Property taxes on factory

$7

$7,000

Accounting staff salaries

$32

$32,000

Rent cost of equipment for sales staff

$36

$36,000

Upper management salaries

$220

$220,000

Annual flat fee for factory maintenance service

$14

$14,000

Machinery depreciation,straight line

$47

$47,000

Total fixed costs

$356

$356,000

Net income

$36

$36,000

A. If new production facility is built, the variable expenses are likely to decrease by 30% but the fixed expenses are likely to increase by 50%. From the above statement, the total variable costs are $161,000 and total fixed costs are $356,000.

The new contribution income statement with 30% decrease in variable expenses and 50% increase in fixed expenses will be:

Existing case

New plant

Contribution income statement

Per unit

Total

Per unit

Total

Sales

$553

$553,000

$553

$553,000

Less: Variable costs

$161

$161,000

$113

$112,700

Contribution margin

$392

$392,000

$440

$440,300

Less: Fixed costs

$356

$356,000

$534

$534,000

Net income

$36

$36,000

-$94

-$93,700

So, the new CM per unit will be $440

New fixed expenses will be $534,000

New profit (Loss) = $93,700 loss

Further, break even point (in units) = Fixed costs/(Selling price per unit – Variable cost per unit)

Break-even point(in dollars) = Fixed cost/Contribution margin ratio

New break even point (in units) = $534,000/$440

= 1213 units

New break-even point in sales dollars = $534,000/($440,300/$553,000*100)

=$670,683.62

Under new production facility

New Break-even

New Year 4

Units

1213

6000

Sales revenue

$670,683.62

$3,318,000

NOI

0

$144,000

Ans.B.

If TrueBeat sells the same units as planned for Year 4 in the new plant,i.e.,6,000 units:

The new Margin of Safety (MOS)units = Sales units – Break even units

= 6000 units – 1213 units

=4787 units

Margin of safety(in dollars) = Sales revenue – Break even point (in dollars)

= (6000*$553) - $670,683.62

=$3,318,000 - $670,683.62

=$2,647,316.38

.

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