he industry in which West Company operates is quite sensitive to regular movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits. Required:
West Company’s contribution format income statement for March 2020 is given
below:
Sales (15,000 units X $30 per unit) $450,000
Variable expenses 315,000
Contribution margin 135,000
Fixed expenses 90,000
Net operating income $ 45,000
The industry in which West Company operates is quite sensitive to regular
movements in the economy. Thus, profits vary considerably from year to year
according to general economic conditions. The company has a large amount of
unused capacity and is studying ways of improving profits.
Required:
The company CEO has asked you as a Senior Manager to evaluate the below
situations with recommendations:
1- New equipment has come onto the market that would allow West
Company to automate a portion of its operations. Variable expenses
would be reduced by $9 per unit. However, fixed expenses would
increase to a total of $225,000 each month. How Net Income would
appear if the new equipment were purchased. As a Senior Manager,
what factor/s would be paramount in your mind deciding whether to
purchase the new equipment?
2- If you recommended not to purchase the new equipment, the marketing
manager argues that the company’s marketing strategy should be
changed. Rather than pay sales commissions, which are currently
included in variable expenses, the company would pay sales-persons
fixed salaries and would invest heavily in advertising. The marketing
manager claims this new approach would increase unit sales by 30%
without any change in selling price; the company’s monthly fixed
expenses would be $180,000; and its net operating income would
increase by %20. Compute the break-even point in dollar sales for the
company under the new marketing strategy. Do you agree with the
marketing manager’s proposal?
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