Reference no: EM132590302

Cost Volume Profit Analysis

The following information for 2020 for Northern Telecom is available:

Fiber Optic Capacity        10,000 dBm

Fiber Optic Sold in year    2,000 dBm

Sales                            $1,500,000

Variable Costs                650,000

Contribution Margin         $850,000

Fixed Costs

Manufacturing          180,000

Selling                    200,000

Administration          90,000

Income before taxes  $ 380,000

Income Taxes @ 40% 152,000

Net Income            $ 228,000

• dBm is the power ratio in decibels of the measured power referenced to one milliwatt

Instructions:

Consider each of the following scenarios independently:

Question (a) Calculate the break-even volume in dBm for the year

Question (b) Northern Telecom expects to sell 2,500 dBm power next year, calculate the expected after-tax income, assuming costs and prices remain the same.

Question (c) The Director of Sales says he can resell fiber to another network in a nearby city but will require Northern Telecom to pay $85,500 to advertise the product. In addition, Northern Telecom will have to pay additional network costs of $125 for each fiber dBm sold. Calculate the number of fiber dBm that will have to be sold to maintain ththe current after-tax net income.

Question (d) Northern Telecom wants to ramp up production of its fiber facilities by investing in a new tower that will cost $300,000. The benefit will be that variable costs will decrease by $75.00 per dBm . Calculate the new break even in fiber dbm if the new tower is purchased.

Question (e) Assume instead that Northern Telecom does not purchase the new tower or begin reselling fiber in the new city. The company is worried that per-fiber dBm selling prices will decline by 15% and variable costs will increase by $100 per fiber dBm. Calculate the sales volume in dollars needed if Northern Telecom is to maintain after tax income of $228,000.