Show steps Question 4 20 mins 12 marks The fellowing monthly

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Question 4 (20 mins, 12 marks) The fellowing monthly data are available for the Dcdge Company and ts only product, Product Total Per Unit 275 110 Sales (600 units] Variable expenses Contribution margin Fixed expenses $165,000 66·000 Net income546 200 Required a) Without resorting to cakulations, what is the total contribution marin at the break-even point? (1 mark) b) Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce varisble costs by $10. The company\'s marketing manager predicts that this would reduce the averall quality af the product and thus would result in a decline in sales to a level of S50 units per month. Should this change be made? (3 marks) c) Assume that Dodge Company is currently seling 600 units of Praduct 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 $30,000 per month. Management believes that these actions win increase unit sales by 50%. Should these changes be made? 14 marks) ) Assume that Dodge Company is currently selling 600 units af Product 5W. Management wants to automate a portion of the production process for Product SW. The new equi 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 pment the reliability of Product SW, thus resulting in an increase in monthly sales of will increase 12%. Should these changes be made 4 marks)

Solution

Answer a. Contribution Margin at BEP = $52,800 (Fixed Cost) Answer b. Expected Total Contribution - 550 Units X $175      96,250.00 Present Total Contribution- 600 Units X $165      99,000.00 Increase (Decrease) in Total Contribution      (2,750.00) The Plastic Gearing should not be used to manufacture. It will decrease the Net Income by $2,750. Answer c. Expected Total Contribution - 600 Units X 150% X $140    126,000.00 Present Total Contribution- 600 Units X $165      99,000.00 Increase (Decrease) in Total Contribution      27,000.00 Change in Fixed Costs Incremental Advertising Expenses      30,000.00 Increase (Decrease) in Operating Income      (3,000.00) The changes should not be made as it will decrease the Net Operating Income by $3,000. Answer d. Expected Total Contribution - 600 Units X 112% X $185    124,320.00 Present Total Contribution- 600 Units X $165      99,000.00 Increase (Decrease) in Total Contribution      25,320.00 Change in Fixed Costs Incremental Monthly Rental Costs - New Robotic Equip.      10,000.00 Increase (Decrease) in Operating Income      15,320.00 The changes should be made as it will increase the Net Operating Income by $15,320.