Unitech, Inc. manufactures computers. One of the companys products, a laptop computer, sells for $300. The computers are manufactured in a plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $250 per computer. Over the past year, the company sold 800 computers, with the following operating results: (25 pts.)

Total Per Unit Sales (800 computers) $240,000 $300 Less variable expenses 200,000 250 Contribution margin 40,000 $ 50 Less fixed 25,000 Net income $15,000

Compute: (a) the CM ratio; (b) the break-even point in the number of computers; and (c) the break-even point in $ sales. Compute the margin of safety. Due to an increase in labor rates, the company estimates that variable costs will increase by $25 per computer next year. If this change takes place and the selling price per computer remains constant at $300, what will be: (a) the new CM ratio; (b) the new break-even point in the number of computers?; and (c) the net income. Refer to the original data. The company is considering the construction of a new, automated plant to manufacture the computers. The new plant would cut variable expenses per unit by 50%, but it would cause fixed costs to increase by 40%. If the new plant is built, what would be the companys: (a) new CM ratio; (b) new break-even point in the number of computers; and (c) new net income?

II. Following is the data about the cost behavior of manufacturing costs for Armor Inc. (10 pts.)

MONTH SUPPORT COSTS MACHINE HOURS JANUARY 17,000 900 FEBRUARY 30,000 2,300 MARCH 21,000 1,250 APRIL 15,000 800 MAY 23,500 1,400 JUNE 45,000 4,500 JULY 25,000 1,600 AUGUST 18,500 860

Required: 1. Using the high-low method, determine the support costs function. 2. Using the cost formula you derived above, what support costs would you expect to be incurred during a month with 6,000 machine hours?

3. A least-squares regression analysis gave the following output: Regression equation: Y = $11,267.56 + $7.70X R = 0.978

4. Which method would you recommend, the high-low or the regression method? Explain why.