ADI produces memory enhancement kits for NUY Microwaves. Salesof the kits have been very erratic, with some months showing aprofit and some months showing a loss. Currently, the ADI producesas many units as are required for sales. The ADI's contributionmargin income statement for the most recent month is givenbelow:
Sales (13,500 units at $20 per unit)
$270,000
Variable expenses (all production related)
189,000
Contribution margin
81,000
Fixed expenses (all production related)
90,000
Net operating loss
$ (9,000)
REQUIRED:
1. Compute the ADI’s CM ratio and its break-even point in unitsonly.
2. Refer to the original data. By automating, ADI could slash itsunit variable cost in half. However, fixed costs would increase by$118,000 per month.
(i) At what volume level would the division be indifferent betweenautomation and the current non-automated process? That is, what isthe ADI rule for automation in terms of volume?
(ii) Based on the decision rule above, would you recommend that theADI automate its operations if volume continues at the currentlevel?
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(iii) Assume for this part that the selling price per kit is $24per unit. All other data are the same as stated in the problem.What is the Operating Leverage Ratio (OLR)? If sales decline by10%, what does the OLR predict will be the effect on operatingincome?
(iv) Assume just for this part only that production of memory kitsis increased to 15000 units. However, sales are still 13,500 units.All other data are the same as stated in the problem. What would bethe ADI’s reported income under Absorption Costing?
