QUESTION

Melrose Ltd manufactures electrical switches. Last year Melrose sold 25,000 switches at $50 each. Total costs amounted to $775,000, of which $150,000 was considered fixed.

In an attempt to improve its product, the company is considering replacing a component part that has a cost of $2.50 with a new and improved part costing

$5.50 per unit in the coming year. It is estimated that all other variable costs would remain the same. A new machine would also be needed to increase plantcapacity. The new machine would cost $24,000, have a useful life of 6 years and no salvage value. The only increase in fixed costs, over the preceding year, would be caused by the installation of the new machine to increase plant capacity. The company uses straight line depreciation on all assets. Ignore incometaxes.

Required: with solution method:

a)What was Melrose's break-even point in number of unitslastyear?

b)How many units would the company have to sell last year to earn $140,000 profit after tax if the company tax rateis30%?

c)If Melrose holds the sales price constant and makes the suggested changes, how many units must be sold in the coming year tobreakeven?

d)If the firm holds the sale price constant and makes the suggested changes, what will the revenue have to be in the coming year to make the same net profit as lastyear?

e)If Melrose wishes to maintain last year's contribution margin ratio in the coming year, what selling price per unit must it charge to cover the increased direct materialcost?