Question 7 (20 Marks) Smith-Pelley Inc produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows: Sales Less: Variable Expenses Contribution Margin Less: Fixed Expenses Operating Income $540,000 $360,000 $180,000 $120.000 $60.000 The company produced and sold 120,000 kilograms of product during the month. There was no beginning or ending inventories. Required: a) Given the present situation, compute: 1. The break-even sales in kilograms. (2 marks) 2. The break-even sales in dollars. (2 marks) 3. The sales in kilograms that would be required to produce operating income of $90,000. (2 marks) 4. The margin of safety in dollars. (2 marks) b) An important part of processing is performed by a machine that is currently being leased for $20,000 per month. Smith-Pelley has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease. 1. Should the company choose the lease or the royalty plan? Show all calculations. |6 marks) 2. Under the royalty plan, compute the break-even point in kilograms. (2 marks) 3. Under the royalty plan, compute the break-even point in dollars. (2 marks) 4. Under the royalty plan, determine the sales in kilograms that would be required to produce operating income of $90,000. (2 marks)