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PROBLEM 4-32 LO8] Changes in Cost Structure; Break-Even Analysis; Target Profit [LO5, L06, Alliance Enterprises is considering extensively modifying its manufacturing equipment. The modifications will result in less wastage of materials, which will reduce variable manufacturing costs and introduce changes to the production process that will improve product quality. This will allow Alliance to increase the selling price of the product. Annual fixed costs are expected to increase to $750,000 if the modifications are made. Expected fixed and variable costs as well as the selling prices are shown below: Cost Item Selling price per unit Variable cost per unit Fixed costs Existing Equipment $36 $28 $330,000 Modified Equipment $40 $25 $750,000 Required 1. Determine Alliance Enterprises' break-even point in units with the existing equipment and with the modified equipment. 2. Determine the sales level in units at which the modified equipment will achieve a 25% target profit-to-sales ratio (ignore taxes). 3. Determine the sales level in units at which the modified equipment will achieve $63,000 in after-tax operating income. Assume a tax rate of 30%. 4. Determine the sales level at which profits will be the same for either the existing or modified equipment.

PROBLEM 4-32 LO8] Changes in Cost Structure; Break-Even Analysis; Target Profit [LO5, L06, Alliance Enterprises is considering extensively modifying its manufacturing equipment. The modifications will result in less wastage of materials, which will reduce variable manufacturing costs and introduce changes to the production process that will improve product quality. This will allow Alliance to increase the selling price of the product. Annual fixed costs are expected to increase to $750,000 if the modifications are made. Expected fixed and variable costs as well as the selling prices are shown below: Cost Item Selling price per unit Variable cost per unit Fixed costs Existing Equipment $36 $28 $330,000 Modified Equipment $40 $25 $750,000 Required 1. Determine Alliance Enterprises' break-even point in units with the existing equipment and with the modified equipment. 2. Determine the sales level in units at which the modified equipment will achieve a 25% target profit-to-sales ratio (ignore taxes). 3. Determine the sales level in units at which the modified equipment will achieve $63,000 in after-tax operating income. Assume a tax rate of 30%. 4. Determine the sales level at which profits will be the same for either the existing or modified equipment.

Managerial Accounting
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 13E
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PROBLEM 4-32 Changes in Cost Structure; Break-Even Analysis; Target Profit [LO5, LO6,LO8] Alliance Enterprises is considering extensively modifying its manufacturing equipment. The modifications will result in less wastage of materials, which will reduce variable manufacturing costs and introduce changes to the production process that will improve product quality. This will allow Alliance to increase the selling price of the product. Annual fixed costs are expected to increase to $750,000 if the modifications are made. Expected fixed and variable costs as well as the selling prices are shown below: Cost Item Selling price per unit Variable cost per unit Fixed costs Existing Equipment $36 $28 $330,000 Modified Equipment $40 $25 $750,000 Required 1. Determine Alliance Enterprises' break-even point in units with the existing equipment and with the modified equipment. 2. Determine the sales level in units at which the modified equipment will achieve a 25% target profit-to-sales ratio (ignore taxes). 3. Determine the sales level in units at which the modified equipment will achieve $63,000 in after-tax operating income. Assume a tax rate of 30%. 4. Determine the sales level at which profits will be the same for either the existing or modified equipment.
Transcribed Image Text:PROBLEM 4-32 Changes in Cost Structure; Break-Even Analysis; Target Profit [LO5, LO6,LO8] Alliance Enterprises is considering extensively modifying its manufacturing equipment. The modifications will result in less wastage of materials, which will reduce variable manufacturing costs and introduce changes to the production process that will improve product quality. This will allow Alliance to increase the selling price of the product. Annual fixed costs are expected to increase to $750,000 if the modifications are made. Expected fixed and variable costs as well as the selling prices are shown below: Cost Item Selling price per unit Variable cost per unit Fixed costs Existing Equipment $36 $28 $330,000 Modified Equipment $40 $25 $750,000 Required 1. Determine Alliance Enterprises' break-even point in units with the existing equipment and with the modified equipment. 2. Determine the sales level in units at which the modified equipment will achieve a 25% target profit-to-sales ratio (ignore taxes). 3. Determine the sales level in units at which the modified equipment will achieve $63,000 in after-tax operating income. Assume a tax rate of 30%. 4. Determine the sales level at which profits will be the same for either the existing or modified equipment.
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