This is a comprehensive problem all contained on this spreadsheet tab.
FACTS:
1. Elliott Incorporated manufactures garden tools, and although the manufacturing equipment is perfectly functional, it is not modern.
2. Upgrading to modern equipment would speed up the manufacturing process such that direct labor and variable manufacturing costs would be reduced by 40% on a per-unit basis. Hint: You do not need current units produced to calculate this problem.
3. The cost of such an upgrade would equal $1,500,000 per year for depreciation and financing costs net of tax benefits of these costs.
4. The additional costs would be accounted for as fixed manufacturing overhead.
5. Elliott is currently operating at full capacity and management believes they could increase sales to $6,000,000 at current prices if they had additional capacity.
Elliott's current sales and costs are as follows:
|
Sales
|
$4,500,000
|
|
Direct materials
|
780,000
|
|
Direct labor
|
1,540,000
|
|
Manufacturing overhead-variable
|
364,500
|
|
Manufacturing overhead-fixed
|
750,000
|
|
Selling expenses-variable
|
90,000
|
|
Selling expenses-fixed
|
250,000
|
|
Administrative expenses-variable
|
60,000
|
|
Administrative expenses-fixed
|
200,000
|
a. Prepare a CVP for Elliott based on the current production.
b. Compute contribution margin ratio for current production.
c. Compute breakeven dollars for current production.
d. Prepare a CVP based on the proposed equipment upgrade.
e. Compute contribution margin ratio based on the proposed equipment upgrade.
f. Compute breakeven dollars for current production.
g. Should Elliott proceed with the proposed upgrade?