Su Equipment Company manufactures and distributes industrial air compressors. The following costs are available for the year ended December 31, 2019. The company has no beginning inventory. In 2019, 1,500 units were produced, but only 1,200 units were sold. The unit selling price was $4,500. Costs and expenses were: Direct material $800.00 Direct labor $1,500.00 Variable manufacturing overhead $300.00 Variable selling and administrative costs $70.00 Fixed manufacturing overhead $1,200,000.00 Fixed selling and administrative costs $100,000.00 Required (Round to the nearest dollar and whole unit.) Compute the contribution margin per unit for the current year. Compute the contribution margin ratio for the current year. Compute the break-even point in units for the current year. Compute the break-even point in dollars for the current year. Prepare the contribution margin income statement for the current year using the 1,200 units sold for revenue and selling and administrative expense. Use 1,500 units for all other variable costs. Assume the company wants to earn a pretax profit of $2,000,000. How many units would the company need to sell to achieve this level of profit? Next year the company plans to use new materials which will reduce direct materials costs to $750.00 per unit and direct labor costs to $1,200.00 per unit and not affect product quality or marketability. The use of the new materials will require the purchase of a new machine which will increase fixed manufacturing costs to $2,500,000. All other costs and selling price remains the same. Compute the following for next year: Contribution margin per unit. Break-even point in units. Should the company use the new materials? Provide evidence to support your decision.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Su Equipment Company manufactures and distributes industrial air compressors. The following costs are available for the year ended December 31, 2019. The company has no beginning inventory. In 2019, 1,500 units were produced, but only 1,200 units were sold. The unit selling price was $4,500. Costs and expenses were:

Direct material	$800.00
Direct labor	$1,500.00
Variable manufacturing overhead	$300.00
Variable selling and administrative costs	$70.00
Fixed manufacturing overhead	$1,200,000.00
Fixed selling and administrative costs	$100,000.00

Required (Round to the nearest dollar and whole unit.)

Compute the contribution margin per unit for the current year.
Compute the contribution margin ratio for the current year.
Compute the break-even point in units for the current year.
Compute the break-even point in dollars for the current year.
Prepare the contribution margin income statement for the current year using the 1,200 units sold for revenue and selling and administrative expense. Use 1,500 units for all other variable costs.
Assume the company wants to earn a pretax profit of $2,000,000. How many units would the company need to sell to achieve this level of profit?
Next year the company plans to use new materials which will reduce direct materials costs to $750.00 per unit and direct labor costs to $1,200.00 per unit and not affect product quality or marketability. The use of the new materials will require the purchase of a new machine which will increase fixed manufacturing costs to $2,500,000. All other costs and selling price remains the same. Compute the following for next year:
1. Contribution margin per unit.
2. Break-even point in units.
3. Should the company use the new materials? Provide evidence to support your decision.

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