Ethics, CVP analysis Allen Corporation produces a molded plastic casing, LX201, for desktop computers. Summary data from its 2008 income statement are as follows:

Jane Woodall, Allen’s president is very concerned about Allen Corporation’s poor profitability. She asks Max Lemond, production manager, and Lester Bush, controller, to see if there are ways to reduce costs. After two weeks, Max returns with a proposal to reduce variable costs to 52% of revenues by reducing the costs Allen currently incurs for safe disposal of wasted plastic. Lester is concerned that this would expose the company to potential environmental liabilities. He tells Max, “We would need to estimate so of these potential environmental costs and include them in our analysis.” “You can’t do that” Max replies “We are not violating any laws. There is some possibility that we may have to incur environmental cost the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are danger of shutting down the company. We don’t want all our colleagues to lose their jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing.”

1. Calculate Allen Corporation’s breakeven revenues for 2008.

2. Calculate Allen Corporation’s breakeven revenues if variable costs are 52% of revenues.

3. Calculate Allen Corporation’s operating income for 2008 if variable costs had been 52% of revenues

4. Given Max Lemond’s comments, what should Lester Bush do?

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Revenues Variable costs Fixed costs Operating income $5,000,000 3,000,000 2,160,000 S (160,000)