# Ch3sol - E3-17(similar Patel Manufacturing sold 430,000...

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E3-17 (similar) Patel Manufacturing sold 430,000 units of its product for \$72 per unit in 2014. Variable cost per unit is \$60 , and total fixed costs are \$1,720,000. Requirements 1. Calculate (a) contribution margin and (b) operating income. 2. Patel's current manufacturing process is labor intensive. Kate Schmidt, Patel's production manager, has proposed investing instate-of-the-art manufacturing equipment, which will increase the annual fixed costs to \$5,160,000. The variable costs are expected to decrease to \$44 per unit. Patel expects to maintain the same sales volume and selling price next year. How would acceptance of Schmidt's proposal affect your answers to (a) and (b) in requirement 1? 3. Should Patel accept Schmidt's proposal? Explain. Requirement 1. Calculate (a) contribution margin and (b) operating income.
(a) An important tool used in CVP is the contribution margin . (Total revenues – Total variable costs = ?) The contribution margin indicates why operating income changes as the number of units sold changes. Calculate the contribution margin. You will need to calculate the total revenues (Units produced x Selling price per unit = ?) and total variable costs .( Units produced x Variable cost per unit = ?)
Requirement 2. Patel 's current manufacturing process is labor intensive. Kate Schmidt , Patel 's production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to \$5,160,000 . The variable costs are expected to decrease to \$44 per unit. Patel expects to maintain the same sales volume and selling price next year. How would acceptance of Schmidt 's proposal affect your answers to (a) and (b) in requirement 1?
Contribution margin \$12,040,000 (b) Next, recalculate the operating income that would occur under the proposal. Recall that the total annual fixed costs are expected to increase.