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Mazoon Company works in a cyclical, volatile industry where sales and operating income vary from year-to-year based on general economic conditions. The company has a
Mazoon Company works in a cyclical, volatile industry where sales and operating income vary from year-to-year based on general economic conditions. The company has a new CEO who is considering new proposals to improve company's operating income with their excess capacity. The management of the company contacted you to help them with their decisions. They prov you with the following income information for last year as follows: SALES (45,000 units x $15) $ 675,000 VARIABLE EXPENSES 472,500 CONTRIBUTION MARGIN $ 202,500 FIXED EXPENSES 135,000 INET OPERATING INCOME $ 67,500 1. Proposal One: The production manager suggested to purchase a new heavy machine with the funds available that would allow the company to reduce its variable expenses by $6 per unit increase the fixed expenses by $270,000 per year at the same time. Compute the following for both the present income statement vs the proposed income statement: (10 marks) a. Contribution margin per unit and percentage b. Break-even point in units and in sales c. Margin of safety d. How much would the company's net income decline with a 10% decline in sales? 2. Proposal Two: The marketing manager believes that sales volumes can be increased by intensive marketing and promotional campaign. In her argument, she said that, in reference to the original income statement, the company currently rely on paying sales commissions to salespeople which are accounted for as variable expenses. The marketing manger suggested relying heavily on advertising and paying the sales force fixed salaries. The manager expects an increase of sales by 30% (no effect on selling price), an increase in total operating income by 20% ar new total fixed cost will be $270,000. Compute the following for the proposed income statement: a. Contribution margin per unit and percentage. (7 marks) b. Break-even point in units and in sales c. If the company has a target net income of $80,000 and income taxes are 20%. What is required sales in dollars for the company to meet its target. 3. Which proposal should be accepted? Explain your answer logically and clearly considering all economic factors
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