Question 1

Husky Corp. manufactures luxury toys for specialty toy stores. For the year just ended, Husky had sales of 9,000 units and had the following operating results:

Husky Corp.

Variable costing income statement

For the year ended December 31

Sales $1,800,000

Variable costs:

Manufacturing 630,000

Selling and administrative 360,000

990,000

Contribution margin 810,000

Fixed costs:

Manufacturing 180,000

Selling 225,000

Administrative 90,000

495,000

Operating income 315,000

Income taxes (40%) 126,000

Net income $ 189,000

Husky has a capacity of 15,000 units.

Required:

(Note: Each question is independent of the others and based on the original data.)

1. What is the break-even point in units for Husky?
2. Husky predicts sales of 10,500 units next year. If prices and cost behaviours remain consistent, what will after-tax net income be?
3. Husky is planning to expand its product line to another province and estimates that marketing in this new location will cost the company an additional $123,000 for each of the next three years. Husky also expects to pay an additional $5 per unit commission to the salespeople in this new location. Assuming all other costs remain the same, how many units would need to be sold in the new location to maintain Huskys after-tax net income of $189,000? Does Husky have the capacity currently to handle the increase in volume?
4. Husky is considering replacing its manual process with an automated process. This would increase fixed manufacturing costs by $117,000 per year, while variable manufacturing costs would decrease by $5 per unit. What would the new break-even sales level in units be?
5. Husky estimates that the selling price for products will decrease by 10% next year, while variable costs would increase by $8 per unit and fixed costs would decrease by $50,000. What level of sales in dollars would be required to maintain the current after-tax net income of $189,000?