Question
Ringsmith Company is considering two different processes to make its productprocess 1 and process 2. Process 1 requires Ringsmith to manufacture subcomponents of the product
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Ringsmith Company is considering two different processes to make its productprocess 1 and process 2. Process 1 requires Ringsmith to manufacture subcomponents of the product in-house. As a result, materials are less expensive, but fixed overhead is higher. Process 2 involves purchasing all subcomponents from outside suppliers. The direct materials costs are higher, but fixed factory overhead is considerably lower. Relevant data for a sales level of 39,000 units follow:
Process 1 Process 2 Sales $10,296,000 $10,296,000 Variable expenses 3,978,000 5,772,000 Contribution margin $6,318,000 $4,524,000 Less total fixed expenses 3,505,265 1,386,890 Operating income $2,812,735 $3,137,110 Unit selling price $264 $264 Unit variable cost $102 $148 Unit contribution margin $162 $116 Required:
1. Compute the degree of operating leverage for each process. Round your answers to one decimal place. Use the rounded answers in subsequent calculations.
Process 1 Process 2 2. Suppose that sales are 20 percent higher than budgeted. By what percentage will operating income increase for each process?
Process 1 % Process 2 % What will be the increase in operating income for each system? Round your answers to the nearest dollar.
Process 1 $ Process 2 $ What will be the total operating income for each process? Round your intermediate calculations and final answers to the nearest dollar. Use the rounded answers in subsequent calculations.
Process 1 $ Process 2 $ 3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income decrease for each process?
Process 1 % Process 2 % What will be the total operating income for each process? Round your answers to the nearest dollar.
Process 1 $ Process 2 $
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