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Houston-based Advanced Electronics manufactures audio speakers for desktop computers. The following

 

data relate to the period just ended when the company produced and sold 42,000 speaker sets:

 

Sales ......................................................................................................................................................... $3,360,000

 

Variable costs ............................................................................................................................................ 840,000

 

Fixed costs ................................................................................................................................................ 2,280,000

 

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs.

 

Variable costs are expected to average $18 per set; annual fixed costs are anticipated to be $1,984,000.

 

(In the following requirements, ignore income taxes.)

 

Required:

 

1.

 

 

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.

 

 

 

2.

 

 

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

 

 

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, what must management do to fixed costs? By how much

must fixed costs change?

 

 

 

b.

 

 

If fixed costs remain constant, what must management do to the variable cost per unit? By

how much must unit variable cost change?

 

 

 

4.

 

 

Determine the impact (increase, decrease, or no effect) of the following operating changes.

 

 

a.

 

 

Effect of an increase in direct material costs on the break-even point.

 

 

b.

 

 

Effect of an increase in fixed administrative costs on the unit contribution margin.

 

 

c.

 

 

Effect of an increase in the unit contribution margin on net income.

 

 

d.

 

 

Effect of a decrease in the number of units sold on the break-even point.

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