With the new plant in operation, what would be the production level necessary to maintain Net Operating Income at a level similar to a competitor of WMM?
Scenario:
CC researched and came up with the contribution margin Income Statement of a competitor, Moonlight Inc. The break-even sales at this point are 40,000 units Sales $1,800,000
Variable expenses 1,000,000
Contribution Margin 800,000
Fixed expenses 400,000
Net Operating Income 400,000
Methodology:
The consulting group projects that since WMM’s plant will be automated, it will increase the contribution margin per unit by 50% and fixed expenses by 75%. The increase in contribution margin will be due to production efficiencies which will reduce variable expenses, while revenue per unit remaining
unchanged.
Under the assumption that the same number of products are manufactured and sold as in the above scenario, the group will develop a new Contribution Margin Income Statement, new breakeven sales in units and calculate the degree of operating leverage.
Based on the above calculation, they would advise regarding the risk level of this scenario (High, medium, or low) and provide a rationale for the same.