EXERCISE 3: Sensitivity Analysis Business owners can use these tools to make better decisions Situation 1 Abner can purchase equipment that would automate its production facility. The equipment would raise fixed costs to $600,000 per year. However, automation would cause the Variable Cost per Unit to drop to $100 per unit. If the equipment is purchased, how many units would Page 2 of 6 Abner need to sell to make $200,000 in profit? Fixed Costs+Desired Profit) UCM ales in Units units Should Abner invest in the equipment? YES or NO Situation 2: Using original assumptions (no factory automation), Abner estimates that $40,000 of radio advertising could increase the company's sales by 10%. Abner currently sells 7,500 units per year. Should the company purchase the radio ads? Be sure to use the original UCM of $80 in this problem. To solve this problem, calculate the increase in Contribution Margin from the radio ads and compare this figure to the ad cost. If the increase in CM exceeds the cost of the ads, then the company should purchase the ads. 10% Increased Sales in Units x UCM increased CM Cost of Ads Difference Should they purchase the radio ads? Yes or No Margin of Safe The difference between Expected/Actual Sales and the Sales amount at the break-even point. The Margin is Safety represents the amount the company's sales could decline before reaching the break even point. Therefore, you must first know the break even point before calculating margin of safety