Reference no: EM132545594

Question - Scenario: James Thomas is the new production manager for Lights Inc., a small light manufacturing business where you work. Since James is new at his position, he has provided a set of recommendations to enhance business profitability to you. He has suggested adding a showroom that will add $25,000 in fixed costs to the $260,000 in fixed costs currently spent. In addition, James is proposing a 10% price decrease ($50 to $40) in product pricing will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $18 per light fixture. You are impressed with James' ideas but concerned about the effects these changes will have on the break-even point and the margin of safety.

You will conduct the following calculations to take a decision (please answer under each question):

1) What is the current break-even point?

2) What would be the new break-even point if you implement James' suggestions?

3) What is the margin of safety under the recommendations?

4) How would profitability increase or decrease if you implement James' recommendations?

5) Assume you can change the manufacturing method of your light fixtures. The new fixed costs will decrease to $150,000 and the variable cost will increase to $20. Would you consider this plan instead of the one proposed by James? Why or why not? Assume pricing will remain at $40 and sales at $20,000. Please include formulas.