EXERCISE 2

Smithville company sells lawnmowers. Each lawnmower is sold at $500. Variable Costs are $350. Smithville Fixed Costs are $375,000

REQUIRED:

1. Calculate Breakeven point in units? (2 points)

2. Calculate Breakeven point in $sales? (2 points)

Smithville is considering the acquisition of a new machine that will reduce variable costs in 20%,but increase the fixed costs in $131,000.

REQUIRED:

3. Calculate Breakeven point in units with the new machine? (3 points)

4. Calculate Breakeven point in $sales with the new machine? (3 points)

5. Is the acquisition of the new machine a good investment? (2 points)

6. Using the information if the company acquire the new machine, how much units are required to sell to obtain a pretax income of $77,000? (3 points)

7. At the sales level computed in exercise 6, How much is the margin of safety in percentage? (2 points)

8. At the sales level computed in exercise 6, How much is the DOL? (3 points)

9. If the sales level increases by 10%, how much the pretax income will increase? (2 points)