Wilton Company Is Analyzing Two Alternative Methods of Producing Its

question 42

Essay

Wilton Company is analyzing two alternative methods of producing its product. The production manager indicates that variable costs can be reduced 40% by installing a machine that automates production, but fixed costs would increase. Alternative 1 shows costs before installing the machine; Alternative 2 shows costs after the machine is installed. (a) Compute the break-even point in units and dollars for both alternatives. (b) Prepare a forecasted income statement for both alternatives assuming that 30,000 units will be sold. The statements should report sales, total variable costs, contribution margin, fixed costs, income before taxes, income taxes, and net income. Below the income statement, compute the degree of operating leverage. Which alternative would you recommend and why?

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Definitions:

Trade Secrets

Confidential business information that provides an enterprise with a competitive edge and is protected from disclosure.

Economic Espionage

The act of illegally obtaining confidential business information, such as trade secrets or intellectual property, for economic advantage.

United States

A country located in North America, comprising 50 states, a federal district, five major self-governing territories, and various possessions.

$600 Billion

An indicative monetary figure which could refer to various financial contexts, such as the value of a particular market, a government budget, or a company's revenue.