Reference no: EM132767876

Question - West Company's contribution format income statement for March 2020 is given below:

Sales (15,000 units X $30 per unit) $450,000

Variable expenses 315,000

Contribution margin 135,000

Fixed expenses 90,000

Net operating income $ 45,000

The industry in which West Company operates is quite sensitive to regular movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.

Required - The company CEO has asked you as a Senior Manager to evaluate the below situations with recommendations:

1- New equipment has come onto the market that would allow West Company to automate a portion of its operations. Variable expenses would be reduced by $9 per unit. However, fixed expenses would increase to a total of $225,000 each month. How Net Income would appear if the new equipment were purchased. As a Senior Manager, what factor/s would be paramount in your mind deciding whether to purchase the new equipment?

2- If you recommended not to purchase the new equipment, the marketing manager argues that the company's marketing strategy should be changed. Rather than pay sales commissions, which are currently included in variable expenses, the company would pay sales-persons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 30% without any change in selling price; the company's monthly fixed expenses would be $180,000; and its net operating income would increase by %20. Compute the break-even point in dollar sales for the company under the new marketing strategy. Do you agree with the marketing manager's proposal?