Preston Company Is Analyzing Two Alternative Methods of Producing Its

question 196

Essay

Preston 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:

Magnetic Drain Plug

A type of plug placed in the oil pan or similar component, featuring a magnet that attracts and holds metal fragments to prevent them from circulating in the system.

Transmission Fluid

A special lubricant designed for transmissions, providing cooling and the necessary pressure for operation, while also lubricating moving parts within the transmission.

Main Pressure

The primary hydraulic pressure in a system, such as an automatic transmission, crucial for its operation and control of gears.

Accumulator Seals

Seals used in hydraulic accumulators to prevent fluid leaks, ensuring the system's pressure retention and efficiency.