Lily Flowers is President of Lily Recreation which manufactures recreational equipment. One of the companys products, a skateboard, sells for $37.50. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. The variable costs are high, totaling $22.50 per skateboard of which 60% is direct labor cost.

Over the past year the company sold 40,000 skateboards, with the following operating results:

Sales (40,000 skateboards) $1,500,000

Variable Expenses 900,000

Contribution Margin 600,000

Fixed Expenses 480,000

Net Operating Income 120,000

Management is anxious to maintain and perhaps even improve its present level of income from the skateboards.

1. Refer to the original data. Lily is considering the construction of a new, automated plant. The new plant would slash variable costs by 40%, but it would cause fixed cost to increase by 90%.

If the new plant is built, what would be the companys new Contribution Margin ratio and new break-even point in skateboards?

2. Refer to the data in (5) above.

1. If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year?
2. Assume that the new plant is constructed and that next year the company manufactures and sells 40,000 skateboards (the same number as sold last year). Prepare a contribution format income statement.
3. If you were a member of top management, would you have been in favor of constructing the new plant? Explain.