Berber Company is considering expanding its production facilities with a building costing $260,000 and equipment costing $84,000. Building and equipment depreciable lives are 25 and 20 years, respectively, with straight-line depreciation and no salvage value. Of the additional depreciation cost, 5% is expected to be allocated to inventories.
The plant addition will increase volume by 50%; the product's sales price is expected to remain the same. The new union contract calls for a 5% increase in wage rates. Because of the increased plant capacity, quantity buying will yield an overall 6% decrease in materials cost. One additional supervisor must be hired at a salary of $15,000.
The following data pertain to last year:
Sales, 50,000 units at $10 per unit
Direct materials, $2 per unit
Direct labor, $4 per unit
Variable factory overhead, $1.30 per unit
Fixed factory overhead, $72,500
Variable marketing expense, $12,000
Fixed marketing expense, $11,000
With the volume increase, advertising, which is 10% of present fixed marketing expense, will be increased 25%.
Required:
Prepare an analysis estimating contribution margin and operating income for both the present and proposed capacities.