Athabaska Ltd. produces a lens used for webcams. Summary data from its year 2011 income statement are as follows:
Revenues ........ $8,000,000
Variable costs ........ 4,320,000
Fixed costs ........ 3,900,000
Operating income ..... $ (220,000)
The president of Athabaska, Roberta Klein, is very concerned about the company's operations. She has discussed the situation with the Operations Manager, Roland Bell, and the controller, Clara Walton.
After two weeks, Roland returns with a proposal. After researching various component parts, he advises that he can reduce variable costs to 48% of revenues by changing both the direct materials and the production process. The downside of this proposal is that the new direct material (although cheaper) results in more waste and is more toxic to the environment.
Currently, waste produced in the production process does not require any special treatment and is disposed of normally. Roland points out that there are no current specific laws governing the disposal of this waste created by the use of the new material, and therefore production costs can be cut by using this material. Clara is concerned that this would expose the company to potential environmental liabilities. She believes that these potential future costs need to be estimated and included in the analysis. Roland disagrees and reiterates that there are no laws being violated and replies, "There is some possibility that we may have to incur costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they are. The market is very tough and we are in danger of shutting down the company. We don't want all our colleagues to lose their jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing."
1. Calculate Athabaska's breakeven revenues for the year 2011.
2. Calculate Athabaska's breakeven revenues if variable costs are 48% of revenues.
3. Calculate Athabaska's operating income in 2011 if variable costs had been 48% of sales.
4. What should Roberta Klein do?

  • CreatedJuly 31, 2015
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