Reference no: EM132939147
Dewqas Limited has prepared the following profit analysis, for the current financial year:
Sales (150,000 units) $ 1,140,000
Variable expenses $ 720,000
Contribution margin $ 420,000
Fixed expenses $ 261,000
Profit $ 159,000
Management are considering a range of options to improve profitability. These options include reducing the selling price by $0.15 per unit and updating machinery and production methods. If machinery and production methods are updated, fixed expenses will increase by $80,000 per year and variable expenses will decrease by $1.50 per unit. However, management are concerned at the increased risk and changes to the level of operating gearing. If the selling price is reduced by $0.15 per unit, the number of units sold is expected to increase by 5%. There is no reason why management cannot reduce the selling price and update machinery and production at the same time.
Problem 1) Calculate the contribution margin per unit, total fixed costs, the breakeven point in units, and total expected profit for all of the possible choices that management can make.
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