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:

Pain Endurance

The capacity or ability of an individual to tolerate pain or hardship, often in the context of physical or psychological challenges.

Hypnosis

A mental state of heightened suggestibility, induced by a hypnotic induction, which can facilitate therapeutic changes.

Dissociation

A psychological condition in which there is a disconnection or lack of continuity between thoughts, memories, surroundings, actions, and identity.

Divided Consciousness

A theory in psychology in which the mind splits into different levels of awareness, especially noted during multitasking or hypnosis.