D) The use of the automated process would affect both fixed and variable costs. Fixed costs will increase by $10,000 from $52,800 to $62,800. Variable costs will decrease by $20 per unit from $110 to $90, and the unit contribution margin will increase from $165 to $185 Expected total contribution margin = 400 units x 112% x $185 = $82,880 Present total contribution margin = 66 000 Increase in total contribution margin = $16,880 Increase in fixed costs (monthly equipment rental) = 10,000 Increase in net income = $ 6,880 The changes should be made. They will increase income by $6,880 This study source was downloaded by 100000782132032 from CourseHero.com on 09-30-2022 13:53:48 GMT -05:00 https://www.coursehero.com/file/13804832/ACC406-Midterm-Test-1-solutions/Question 3 (17 marks) The following monthly data are available for the CVP Company and its only product, Product S: Total Per Unit Sales (400 units) $110,000 5275 Variable expenses 44,000 110 Contribution margin $ 66,000 $165 Fixed expenses 52.800 Net income $ 13,200 Required (the following are independent cases): A) What is the total contribution margin at the break-even point? B) Management is contemplating the use of plastic gearing rather than metal gearing in Product S. This change would reduce variable costs by $15 per unit. The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made to maximize income? What would be the impact on income because of this change? C) Assume that the Company is currently selling 400 units of Product S per month. Management wants to increase sales and feels this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase sales by 50%. Should these changes be made to maximize income? What would be the impact on income because of these changes D) Assume that the Company is currently selling 400 units of Product S per month. Management wants to automate a portion of the production process for Product S. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product S thus resulting in an increase in monthly sales of 12%. Should these changes be made to maximize income? What would be the impact on income because of these changes? Answer: A) The total contribution margin is $52,800 since it must be equal to the fixed expenses at the break-even point. B) The $15 decrease in variable costs per unit will cause the contribution margin per unit to increase from $165 to $180. Expected total contribution margin = 350 units x $180 = $63,000 Present total contribution margin = $66,000 Decrease in total contribution margin = $ 3,000 The less costly components should not be used to manufacture Product W. Net income will decrease by $3,000. C) The decrease in selling price per unit will cause the unit contribution margin to decrease from $165 to $140 Expected total contribution margin = 400 x 150% x $140 = $84,000 Present total contribution margin = 66.000 Increase in contribution margin = $18,000 Increase in fixed costs (advertising expense) = 20.000 Decrease in net income $2,000 The changes should not be made. They will decrease income by $2,000