Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 85

CVP analysis—effects of changes in cost structure; breakeven Riveria Co. makes and sells a single product. The current selling price is $32 per unit. Variable expenses are $20 per unit, and fixed expenses total $43,200 per month. Sales volume for May totaled 4,100 units.

Required:

a.Calculate operating income for May.

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b. Calculate the break-even point in terms of units sold and total revenues.

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c. Management is considering installing automated equipment to reduce direct labor cost. If this were done, variable expenses would drop to $14 per unit, but fixed expenses would increase to $67,800 per month.

1. Calculate operating income at a volume of 4,100 units per month with the new cost structure.

2. Calculate the break-even point in units with the new cost structure. (Round your answer.)

3. Why would you suggest that management seriously consider investing in the automated equipment and accept the new cost structure?

4. Why might management not accept your recommendation but decide instead to maintain the old cost structure?

Step 1 of 6

a.

Calculate operating income for May:

Current selling price per unit	$32
Variable expenses	$20
Fixed expenses	$43,200 per month
Sales volume for May	4,100

Steps to calculate operating income:

• Consider revenue value.

• Then subtract variable expenses from revenue to arrive at contribution margin.

• And deduct fixed expense from contribution margin to arrive at operating income.

R Co. Operating income
Revenue	$131,200.00
Variable expense	$82,000
Contribution margin	$49,200.00
Fixed expense	$43,200
Operating Income	$6,000.00