Reference no: EM132956167
Problem - PINK Ltd produces traditional equipment, known as product A, which is sold for $40. The total variable cost is 60% of sales. Last year, the company sold 65,000 units and the total ?xed cost was $480,000. Management is anxious to maintain and even improve the present level of income.
Required -
a. Compute the CM ratio and breakeven points in dollars.
b. Compute the operating leverage at last year's level of sales.
c. The company is considering to construct a new, automated plant to manufacture the products. The new plant will slash variable costs by 40%, but it would cause ?xed cost to increase by 80%. How many units the company has to sell next year in order to earn the same operating income as last year?
d. Assume the new plant is built and the company still sell 65,000 units next year, re-compute the operating leverage based on the information in part c- (hint: you need to recalculate the operating income) and compared with the operating leverage ?gure in part b and explain if the company should use the new cost structure or not.
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