The following monthly data are available for the LaFille Company and its only product, Product SW: total per unit sales 110,000 275 variable expense 44,000 110 contribution margin 66,000 165 fixed expenses 52,800 net income 13200 Required:a) Without resorting to calculations, what is the total contribution margin at the break-even point? b) Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs by $15. The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made? c) Assume that LaFille Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels that this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made? d) Assume that LaFille Company is currently selling 400 units of Product SW. Management wants to automate a portion of the production process for Product SW. The new equipment would reduce direct labour costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SW, thus resulting in an increase in monthly sales of 12%. Should these changes be made?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
The following monthly data are available for the LaFille Company and its only product, Product SW:
total per unit
sales 110,000 275
variable expense 44,000 110
contribution margin 66,000 165
fixed expenses 52,800
net income 13200
Required:
a) Without resorting to calculations, what is the total contribution margin at the break-even point?
b) Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs by $15. The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made?
c) Assume that LaFille Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels that this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made?
d) Assume that LaFille Company is currently selling 400 units of Product SW. Management wants to automate a portion of the production process for Product SW. The new equipment would reduce direct labour costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SW, thus resulting in an increase in monthly sales of 12%. Should these changes be made?
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