Answered: What was Icon Company's break-even…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 36P: Faldo Company produces a single product. The projected income statement for the coming year, based...

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Question

Icon Company produces a single product. It sold 25,000 units last year with the following results:

Total	Per Unit
$625,000	$25.00
$375,000	$15.00
$250,000	$10.00
$150,000
$100,000
$30,000
$70,000

Sales

Variable costs Contribution margin Less Fixed costs Net profit before tax Income tax @ 30% Net profit after tax

In an attempt to improve the product, Icon Company is considering replacing one of its component parts that has cost $3.00 in the past, with a new and better component part costing $6.00 per unit in the coming year. A new machine would also be needed to increase plant capacity to 40,000 units per year. The machine would cost $90,000 with a useful life of 3 years and no salvage value. The company uses straight-line depreciation on all plant assets. The changes would also result in additional fixed costs (other than additional depreciation) of $20,000.

Required:

What was Icon Company's break-even point in units last year?
How many units of product would Icon Company have had to sell last year to earn $91,000 profit after tax?
If Icon Company makes the suggested changes, how many units of product must be sold in the coming year to break even? (Assume no change in the selling price.)
If Icon Company wishes to maintain the same contribution margin ratio as last year, what selling price must it charge in the coming year?
Assume that Icon Company decided to increase the selling price in the coming year to $30.00 per unit. At what volume of sales units will it earn the same profit before tax as last year?
Draw a Profit/Volume graph (PV) to show the Old (last year) and New (coming year at a selling price of $30.00 per unit) situations.

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