ABC Inc. recorded the following information for June 2021:

Sales$900,000

Manufacturing costs630,000

Gross profit270,000

Selling & administrative costs180,000

Operating profit$90,000

The company manufactured and sold 15,000 units in June. Manufacturing costs are 40% variable and 60% fixed, while selling and administrative costs are 30% variable and 70% fixed. The company has significant unused capacity.

The industry in which ABC Inc. operates is sensitive to changes in the economy. Sales and profits vary considerably from year to year depending on economic circumstances. Sales are expected to increase over the next three years, but it is difficult to make predictions beyond three years.

The company is considering ways to improve profits. One option is to invest in new equipment that would allow ABC Inc. to automate part of its operations. Variable manufacturing costs would be reduced by $2.60 per unit, but fixed manufacturing costs would increase by $75,000 per month.

QUESTIONS:

1) For both the current situation and the option described, calculate:

• The break-even point in units
• Contribution margin percentage
• The degree of operating leverage
• The margin of safety

2) Referring to your calculations above, discuss whether or not you think the company should build the new factory.