| This is a comprehensive problem all contained on this spreadsheet tab. |
| FACTS: |
| 1. Elliott Incorporated manufactures garden tools, and although the manufacturing equipment is perfectly functional, it is not modern. |
| 2. Upgrading to modern equipment would speed up the manufacturing process such that direct labor and variable manufacturing costs |
| would be reduced by 40% on a per-unit basis. Hint: You do not need current units produced to calculate this problem. |
| 3. The cost of such an upgrade would equal $1,500,000 per year for depreciation and financing costs net of tax benefits of these costs. |
| 4. The additional costs would be accounted for as fixed manufacturing overhead. |
| 5. Elliott is currently operating at full capacity and management believes they could increase sales to $6,000,000 at current prices if |
| they had additional capacity. |
| Elliott's current sales and costs are as follows: |
| Sales | $4,500,000 |
| Direct materials | 790,000 |
| Direct labor | 1,530,000 |
| Manufacturing overhead–variable | 364,500 |
| Manufacturing overhead–fixed | 750,000 |
| Selling expenses–variable | 110,000 |
| Selling expenses–fixed | 230,000 |
| Administrative expenses–variable | 60,000 |
| Administrative expenses–fixed | 200,000 |
| a. Prepare a CVP for Elliott based on the current production. |
| b. Compute contribution margin ratio for current production. |
| c. Compute breakeven dollars for current production. |
| d. Prepare a CVP based on the proposed equipment upgrade. |
| e. Compute contribution margin ratio based on the proposed equipment upgrade. |
| f. Compute breakeven dollars for current production. |
| g. Should Elliott proceed with the proposed upgrade? |
Ernesto Sabato
week_5_homework_problems.xlsx
