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

question 20

Essay

The following monthly data in contribution format are available for the Feta Company and its only product,Product Gamma:
$$\begin{array} { | l | r | r | } \hline & \text { Total } & \text { Per Unit } \\\hline \text { Sales } & \$ 83,700 & \$ 279 \\\hline \text { Variable costs } & \underline { 32,700 } &\underline { 109} \\\hline \text { Contribution margin } & 51,000 & \$ 170 \\\hline \text { Fixed costs } & \underline { 40,000 } & \\\hline \text { Operating profit } & \$ 11,000 & \\\hline\end{array}$$
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:

Dividends Declared

A formal announcement by a company's board of directors to distribute a portion of the company’s earnings to shareholders.

Dividend Income

Income earned by investors from receiving dividends, which are distributed portions of a company's profit.

Non-Controlling Interest

The portion of equity in a subsidiary not attributable, directly or indirectly, to the parent company, reflecting the minority shareholder's stake in the subsidiary’s net assets.

Entity Method

A valuation approach in business combination accounting that views the acquiring and target company as a single entity from the date of acquisition.