Question

Exercise 7-25 Manufacturing; Using CVP Analysis (LO 7-1, 7-4) Rosario Company, which is located in Buenos Aires, Argentina, manufactures a component used in farm machinery. The firm's fixed costs are 3,200,000 p per year. The variable cost of each component is 1,300 p, and the components are sold for 3,900 peach. The company sold 5,200 components during the prior year. (p denotes the peso, Argentina's national currency. Several countries use the peso as their monetary unit. On the day this exercise was written, Argentina's peso was worth 0.104 U.S. dollar. In the following requirements, ignore income taxes.) Required: 1. Compute the break-even point in units. 2. What will the new break-even point be if fixed costs increase by 10 percent? 3. What was the company's net income for the prior year? 4. The sales manager believes that a reduction in the sales price to 3,400 p will result in orders for 700 more components each year. What will the break-even point be if the price is changed? (Round your answer to the nearest whole number.) 5. Should the price change discussed in requirement (4) be made? 1. Break-even point components 2. New break-even point components 3. Net income 4. New break-even point components 5. Should the price change discussed in requirement (4) be made?

Answer 1

1) Break even unit = Fixed cost/Contribution margin per unit = 3200000/(3900-1300) = 1231 Units

2) New break even unit = (3200000*1.1)/2600 = 1354 Units

3) Calculate net income

Sales (5200*3900)	20280000
Variable cost (5200*1300)	6760000
Contribution margin	13520000
Fixed cost	3200000
Net income	10320000

4) Break even unit = 3200000/(3400-1300) = 1524 Units

5) Net income = (5200+700)*2100-3200000 = 9190000

No Price should not be changed