Question
Walton Hitech Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department
Walton Hitech Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at 3,600 BDT per unit, Walton's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed expenses associated with the new product are budgeted at 45,000,000 BDT for the year. The variable production expenses of the new product are 1,600 BDT per unit and the variable selling cost is 10% of the selling price. Required: a. How many units of the new product must Walton sell during the next fiscal year in order to break even on the product? (3) b. What is the degree of operating leverage for the new product if the manufacturing capacity allocated by management is used? What would be the profit impact if the sales drops by 15%? Proof your finding by constructing a new contribution format income statement assuming 15% decrease in sales. (2+1+4) c. The Marketing Department would like more manufacturing capacity to be devoted to the new product. What would be the percentage increase in net operating income for the new product if its unit sales could be expanded by 10% by increasing in fixed expenses by 5 million BDT? (4) d. Walton's management has stipulated that the new product must earn a profit of at least 12,000,000 BDT in the next fiscal year. What unit selling price would achieve this target profit if all of the manufacturing capacity allocated by management is used and all of the output can be sold at that selling price? (4) e. What is the companys Margin of safety in revenue?
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