2010-04-14_022048_Eaton_Tool_Company_ - plan Contribution...

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Eaton Tool Company has fixed costs of $200,000, sells its units for $56, and has variable costs of $31 per unit.  a. Compute the break-even point. Break-even point = Fixed cost/ Contribution per unit Contribution per unit = selling price per unit – variable cost per unit Break-even point = 200,000/ (56 – 31)    = 8,000 units  b. Mrs. Eaton comes up with a new plan to cut fixed costs to $150,000. However, more labor will now be  required, which will increase variable costs per unit to $34. The sales price will remain at $56. What is the new  break-even point?  New Break-even point = 150,000/ (56 – 34) = 150,000/ 22 = 6,818 units c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old 
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Unformatted text preview: plan)? Contribution margin ratio = (Contribution/ sales) x 100 Old Plan: Contribution margin ratio = (25/ 56) x 100 = 44.6% New Plan: Contribution margin ratio = (22/56) x 100 = 39.3% The profitability at very high volume levels will not be as good as it would be under old plan. Under the old plan the contribution margin ratio is around 45% after the break-even level is crossed (where the fixed costs are completely absorbed) the profit realised would be at the rate of 45% of sales. Whereas under the new plan the profit realised would be only 39%. Thus when the sales volumes are high the profitability under the old plan would be better than the new plan....
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