Evaluation of Cost-Volume-Profit Relationships.

Data for the year 20x7 are as follows:

Sales, 150,000 units sold at $5 per unit.

Variable costs, $3 per unit.

Fixed costs, $200,000.

Capital employed, $800,000.

Federal income tax rate, 50 percent.

For the year 20x8, the following changes in cost-volume profit relationships are proposed:

a. Attempt to increase sales volume 15 percent via a 5 percent decrease in sales price.

b. Reduce variable costs 5 percent through the acquisition of new equipment which would add $20,000 to annual fixed costs and $100,000 to capital employed.

Required:

Determine which, if any, of the proposed changes would be financially justifiable. Assume that results for 20x8 would be the same as 20x7 without the proposed changes. Assume a minimum desired return of 6 percent after tax.