Morrel Co Produces and Sells a Single Product There Are No Beginning or Ending Inventories

question 128

Essay

Morrel Co. produces and sells a single product. The company's income statement for the most recent month is given below:
$\begin{array}{lr}\text { Sales ( 6,000 units at \( \$ 40 \) per unit)}&&\$240,000\\\text { Less manufacturing costs:}\\\text { Direct materials } & \$ 48,000 \\\text { Direct labor (variable) } & 60,000 \\\text { Variable factory overhead } & 12,000 \\\text { Fixed factory overhead } & 30,000&150,000\\\text { Gross margin}&&\$90,000\\\text { Less selling and other costs:}\\\text { Variable selling and other costs}&24,000\\\text { Fixed selling and other costs}&42,000&66,000\\\text { Operating profit}&&\$24,000\end{array}$
There are no beginning or ending inventories.
Required:
a. Compute the company's monthly break-even point in units of product.
b. What would the company's monthly operating profit be if sales increased by 25% and there is no change in total fixed costs?
c. What dollar sales must the company achieve in order to earn an operating profit of $50,000 per month?
d. The company has decided to automate a portion of its operations. The change will reduce direct labor costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new break-even point in units.

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Definitions:

Gaining Prestige

The process of acquiring respect, honor, or recognition from others within a social group.

Marginal Geographical Areas

Areas located at the periphery or edge of regions, often characterized by less favorable conditions for human habitation or agriculture.

Potlatch

On the northwestern coast of North America, a ceremonial event in which a village chief publicly gives away stockpiled food and other goods that signify wealth.

Conspicuous Consumption

The spending of money on luxury goods and services to publicly display economic power—the social status of the consumer.