Question 2 (15 Marks)

B&B produces and sells one single product: BT5. The production capacity of B&B is 28,000 units. Annual sales volume expected in 2021 is 20,000 units.

The following information is estimated for 2021: selling price per unit: $130, variable cost per unit: $90, and annual fixed costs: $600,000.

Required:

Answer the following questions in the spaces provided:

1. What is the available production capacity?

2. What is the contribution margin per unit?

3. What is the contribution margin ratio?

4. What is the break-even-point (BEP) in units?

5. What is the BEP in sales dollars?

6. Prepare a contribution margin income statement for the expected sales in 2021.

7. What would be the firms profit if 36,000 units are sold in 2021?

8. What would be the BEP in units if selling price increases by $10 and the expected sales in 2021 is 20,000 units?

9. What would be the BEP in units if variable costs increase by $5 per unit and annual fixed costs decrease by $119,975 (assume original selling price and expected sales do not change).

10. Using the original data provided, if B&B receives an offer from BigZ Ltd, which is not a current customer of B&B, to purchase additional 7,000 units at $94 per unit, and B&B would incur additional fixed costs of $25,000 but no other fixed costs to produce the 7,000 units required,

1. What would be the incremental revenue if the offer is accepted?

2. What would be the incremental cost if the offer is accepted?

3. Would you accept the offer? Why?

4. What qualitative factor would make you to change your decision (identify only one qualitative factor)?