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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
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.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Pricing Decisions
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education