Foster Corporation produces a molded plastic casing for its video game consoles. Summary data from its 2016 income statement are as follows:
|
Revenues
|
$4,000,000
|
|
Variable costs
|
2,400,000
|
|
Fixed costs
|
1,728,000
|
|
Operating income
|
$ (128,000)
|
The President, Wanda Wilson is very concerned about the company's poor profitability. She asked the production manager and controller to see if there are ways to reduce costs. The production manager suggests that variable costs can be reduced to 52% of revenues by reducing the cost the company currently incurs for safe disposal of wasted plastic.
The controller is concerned that this would expose the company to potential environmental liabilities and tells the production manager that they would need to estimate some of these potential environmental costs and include them in the analysis.
The production manager feels like they are not violating any laws and that while there may be some possibility that they would incur environmental costs in the future, if they bring it up now the proposal would not go through because their senior management always assumes the costs to be larger than they turn out to be.
The market is very tough and we are in danger of shutting down the company and costing them all their jobs. He feels the only reason their competitors are making money is because they are doing exactly what he proposes doing.
Calculate the current break-even revenues. (Show all calculations)
Calculate the break-even revenues if variable costs are 52% of revenues. (Show all calculations)
Calculate what the operating income would be with the proposed change. (Show all calculations)
What advice would you give to Wanda? Take into consideration both quantitative and quantitative factors.
As always, answer in complete sentences.