The Following Monthly Data in Contribution Format Are Available for the Feta

question 107

Essay

The following monthly data in contribution format are available for the Feta Company and its only product, Product Gamma:
$\begin{array}{lrr}&\text {Total}&\text {Per Unit}\\ \text { Sales } & \$ 83,700& \$ 279 \\\text { Variable costs } & 32,700& 109 \\\text { Contribution margin } & 51,000 & \$ 170\\\text { Fixed costs } & 40,000 \\\text { Operating profit }& \$ 11,000\end{array}$
The company produced and sold 300 units during the month and had no beginning or ending inventories.
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 Gamma. This change would reduce variable costs by $18 per unit. The company's sales 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 250 units per month. Should this change be made?
c. Assume that Feta Company is currently selling 300 units of Product Gamma per month. Management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50 percent. Should these changes be made?
d. Assume that Feta Company is currently selling 300 units of Product Gamma. Management wants to automate a portion of the production process for Product Gamma. The new equipment would reduce direct labor 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 Gamma thus resulting in an increase in monthly sales of 12%. Should these changes be made?

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Definitions:

Shareholder Rights Plan

A shareholder rights plan, often called a "poison pill", is a strategy employed by corporations to deter hostile takeovers by making the acquisition prohibitively expensive.

Takeovers

The process by which one company acquires control of another, either through a direct purchase or by acquiring a majority share.

Merger

The joining of two firms to form a single firm.

Acquisition

The process by which one company purchases most or all of another company's shares to gain control.