Riveria Co. makes and sells a single product. The current selling price is $39 per unit....

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Accounting

Riveria Co. makes and sells a single product. The currentselling price is $39 per unit. Variable expenses are $17 per unit,and fixed expenses total $39,500 per month. Sales volume for Maytotaled 4,550 units. Required: a. Calculate operating income forMay. b. Calculate the break-even point in terms of units sold andtotal revenues. (Round your intermediate calculations to thenearest whole dollar.) c. Management is considering installingautomated equipment to reduce direct labor cost. If this were done,variable expenses would drop to $11 per unit, but fixed expenseswould increase to $64,100 per month. c-1. Calculate operatingincome at a volume of 4,550 units per month with the new coststructure. c-2. Calculate the break-even point in units with thenew cost structure. c-3. Why would you suggest that managementseriously consider investing in the automated equipment and acceptthe new cost structure? As sales volume moves above the break-evenpoint, contribution margin and operating income will? By arelatively greater amount than under the old cost structure.

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3.9 Ratings (379 Votes)

	Without Machinery Per Unit	Without Machinery	With Machinery Per Unit	With Machinery	Increase In Sales Volume above Breakeven Point

Units Sold		4550		4550	2290

Sales	39	177450	39	177450	89310
Variable Cost	17	77350	11	50050	25190

Contribution	22	100100	28	127400	64120

Fixed Costs		39500		64100	64100

Profit	13.32	60600	13.91	63300	20

Breakeven Point (Fixed Costs / Contribution Per Unit) (Units)		1795		2289

When the management will install the machinery, the fixed costs will go up and hence the breakeven units will also increase. As seen above, by installing new machinery Breakeven point raised from 1795 units to 2289 units.

When the volume of sales moves above the breakeven point the contribution margin and Operating profit will go up.

Increase in Contribution Margin

Operating Profit will become Positive

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