Labrador Company produces a single product. It sold 75,000 units last year with the following results:

In an attempt to improve its product, Labrador is considering replacing a component part in its product that has a cost of $5 per unit with a new and better part costing $10 per unit during the coming year. A new machine would also be needed to increase plant capacity. The machine would cost $90,000, with a useful life of six years and no salvage value. The company uses straight-line depreciation on all plant assets.
Instructions
Answer the following questions:
(a) What was Labrador's break-even point in units last year?
(b) How many units of product would Labrador have had to sell in the past year to earn $247,500 in operating income after taxes?
(c) If it holds the sales price constant and makes the suggested changes, how many units of product must the company sell in the coming year to break even?
(d) If it holds the sales price constant and makes the suggested changes, how many units of product will Labrador have to sell to make the same operating income before taxes as last year?
(e) If Labrador wishes to maintain the same contribution margin ratio, what selling price per unit of product must it charge next year to cover the increased materials costs?

Transcribed Image Text:

Sales Variable costs Fixed costs Operating income before taxes Income taxes (45%) Operating income $1,875,000 $750,000 300,000 1,050,000 825,000 371,250 $ 453,750