Megaphone Corporation produces a molded plastic casing, M&M101, for many cell phones currently on the market. Summary data from its 2017 income statement are as follows:

Revenues…………………...………………$5,000,000

Variable costs……………..………………...3,250,000

Fixed costs………………….…………..…...1,890,000

Operating income……….....……………$(140,000)

Joshua Kirby, Megaphone’s president, is very concerned about Megaphone Corporation’s poor profitability.

He asks Leroy Gibbs, production manager, and Tony DiNunzo, controller, to see if there are ways to reduce costs.

After 2 weeks, Leroy returns with a proposal to reduce variable costs to 55% of revenues by reducing the costs Megaphone currently incurs for safe disposal of wasted plastic. Tony is concerned that this would expose the company to potential environmental liabilities. He tells Leroy, “We would need to estimate some of these potential environmental costs and include them in our analysis.” “You can’t do that,” Leroy replies.

“We are not violating any laws. There is some possibility that we may have to incur environmental costs in 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 in danger of shutting down the company and costing all of us our jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing.”

Required

1. Calculate Megaphone Corporation’s breakeven revenues for 2017.

2. Calculate Megaphone Corporation’s breakeven revenues if variable costs are 55% of revenues.

3. Calculate Megaphone Corporation’s operating income for 2017 if variable costs had been 55% of revenues.

4. Given Leroy Gibbs’s comments, what should Tony DiNunzo do?