In 2015, Vario Company expects to sell 54,000 units of its only product at a price per unit of $250.

The following information is available:

• The variable manufacturing cost per unit is $145.

• The variable selling expense per unit is $20.

• The fixed manufacturing cost is $50 per unit, based on an annual production volume of 60,000 units.

• Fixed selling expenses are estimated to be $250,000 for the year.

Required:

1. Calculate the break-even sales in dollars.

2. A cost-saving machine can be purchased. It will add $300,000 to the fixed manufacturing costs. The machine will lead to a $5 reduction in variable manufacturing costs per unit. However, because of the poor economy, the product has to be promoted more intensively and the promotion budget will have to increase by $20,000. The company’s tax rate is 40%. 

a. Calculate the sales revenue required to maintain the current level of after-tax profit if the new cost structure is put in place after purchasing the new cost-saving machine.

b. Assume that the sales revenue computed in part (a) above can be achieved regardless of the cost structure. Would you recommend the new cost structure? Explain.

c. Indicate at what level of sales you would change your recommendation in part (b).