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Max Industries Ltd. (Max) produces a single product at its facility in North America. Management at Max have the projections for the upcoming year as
Max Industries Ltd. (Max) produces a single product at its facility in North America. Management at Max have the projections for the upcoming year as follows: Annual fixed costs Selling price per unit Contribution margin ratio Expected sales volume $240,000 $40 0.4 20,000 units Required: a) Calculate the break-even point in units. (1 mark) b) Calculate Max's expected operating income. (1 mark) c) Due to increased competition, Max must make some operational decisions. Max has three options that it can move forward with: Option 1: Do nothing, and as a result sales volume will decrease by 20%. Option 2: Increase marketing costs by $50,000 in order to maintain its sales volume. Option 3: Reduce the selling price by 10% to maintain its sales volume. Evaluate the three options and provide a recommendation on which option Max should move forward with. Show all supporting calculations. (5 marks) d) Refer to the original information. Due to increased competition, Max must lower the price of its product to $35 to maintain its sales level, and management wants to maintain the same operating income. To achieve this, Max has two options available: Option 1: Max can purchase a new automated machine that will lower variable costs per unit to $15 but will increase fixed costs by $80,000. Option 2: Max can outsource part of its production, which will increase the variable cost per unit to $26 and will lower fixed costs by $120,000. Evaluate the two options and provide a recommendation on which option Max should move forward with. Show all supporting calculations. (2.5 marks)
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