Listed here are the total costs associated with the production of 1,000 drum sets manufactured by TrueBeat. The drum sets
Listed here are the total costs associated with the production of 1,000 drum sets manufactured by TrueBeat. The drum sets sell for $540 each.
Plastic for casing—$15,000
Wages of assembly workers—$90,000
Property taxes on factory—$8,000
Accounting staff salaries—$42,000
Drum stands (1,000 stands purchased)—$38,000
Rent cost of equipment for sales staff—$36,000
Upper management salaries—$205,000
Annual flat fee for factory maintenance service—$20,000
Sales commissions—$25 per unit
Machinery depreciation, straight-line—$35,000
New Plant? Because TrueBeat’s capacity is limited to 8,000 units in their current production facility, management would like to explore the impact of building a new production facility. The company is considering a new production facility and equipment that will decrease their variable expenses by 30% but increase fixed expenses by 50%. TrueBeat still plans to produce and sell the same number of units in Year 4 (base). The new plant will give them a relevant range of 5,000 to 12,000 units.
If the new production facility is built, what would be the company’s new (i) contribution margin per unit, (ii) fixed expenses and (iii) the new profit formula? Complete the table below.
- New CM per unit __________________
- New Fixed expenses __________________
- New profit formula __________________
Under New production facility
New Year 4
Assume TrueBeat sells the same units as planned for Year 4 in the new plant, calculate the new margin of safety in (i) units) (ii) dollars and (iii) percent.
- MoS units ______________________
- MoS dollars ______________________
- MoS percent
Conclusion: If you were a member of top management, would you have been in favor of constructing the new plant? Explain in 30 to 50 words