Reference no: EM133079856

Question - Kenect Ltd. manufactures a single high-tech product in its Kingston factory. Its tax rate is 40%. Last year it made and sold 25,000 units and had the following results:

Sales $1,350,000

Less variable expenses 742,500

Contribution margin 607,500

Less fixed expenses 375,000

Operating income $232,500

Required -

1. Calculate Kenect's break-even point in units and dollars using the above data.

2. Calculate the margin of safety in units.

3. Calculate the number of units that need to be sold to earn an after-tax profit of $420,000 with its tax rate being 40%.

4. Each unit produced currently requires one microchip that costs $7.50 per unit. Kenect is considering using a new, faster microchip that costs $9.90 per unit, and if they do switch to the new chip then fixed maintenance costs would drop by $15,000 per year. If these changes are made with no change to the selling price:

a) How many units must be sold next year to earn the same operating income as this year?

b) What would the new break-even point be?

c) Would Kenect be better off or worse off financially with this change?

5. Now assume that no changes in part 4 were implemented (ignore part 4), but Kenect is considering adding a new product to its sales mix. The new product would sell for $95.00/unit and its variable cost would be $50.00/unit. If the new product launches, Kenect will sell 30,000 old products and 20,000 new products (note: Kenect has capacity for 60,000 units so will incur no additional fixed costs). How many units of each product does Kenect need to sell to break even?