Reference no: EM132849107
Question - Last year, the firm sold 30,000 coffee makes with the following results.
The William Company manufactures personal sized drip coffee makers. The coffee makers sell for $25. At present, the coffee makers are manufactured in a small plant that relies on direct labor workers. Therefore, variable costs are high, totaling $15 per machine.
Williams Company Income Statement
Sales $750,000
Less Variable Costs 450,000
Contribution Margin 300,000
Less Fixed Costs 210,000
Operating Income $ 90,000
The firm is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable costs per coffee maker by 40% (that is, variable costs will decrease by 40% per unit). However, fixed costs in the new plant will double.
Required -
A. Calculate the POI for the current manufacturing process and for the new automated plant. (Hint: First calculate the per unit "P" and "V" from the information above.)
B. If unit sales next year are expected to be about the same as this year (about 30,000 units), should the firm go ahead with construction of the new plant?
If unit sales next year are expected to increase to 40,000 units due to expanded marketing of the unit, should the firm go ahead with construction of the new plant?