The following monthly data are available for the Challenger - 14304

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The following monthly data are available for the Challenger Company and its one product, SW, which it manufactures:

Total                                        Per Unit

Sales $110,000                             $275

Variable Product Costs $ 32,000  $ 80

Variable SGA Costs $ 12,000       $ 30

Fixed Overhead $ 12,800

Fixed SGA $ 40,000

Additionally, beginning inventory was 20 units of SW and production during the month was 50 units greater than units sold.


a.Under the above scenario, what are:

1.Total contribution margin.

2.Unit contribution margin.

3.Contribution margin ratio.

4.Total net operating income (NOI).

5.Total earnings before interest and taxes (EBIT).

b.What is the margin of safety in dollars and percent at this sales level?

c.What is the degree of operating leverage at the above sales level?

d.Under the existing production-sales-inventory relationships in the original data, in this month:

1.What is the NOI/EBIT under absorption costing?

2.What is the NOI/EBIT under variable costing?

3.Why does one method produce a higher NOI than the other? Please explain your answer.

e.In the original data, what is the original product cost under absorption cost? Under variable (contribution) cost?

f.What is the break-even point in units and sales dollars?

g.What is the total contribution margin at the break-even point?

h.Management is contemplating the use of plastic gearing rather than the metal gearing in SW. This change would reduce variable costs by $15 per unit. The company’s marketing manager predicts that this would reduce the overall quality of the product and thus would result in a new sales level of 350 units per month, but sales price would stay the same for now. What is the new NOI under this scenario? Should this change be made? Why or why not?

i.Return to the original data above. Management wants to increase sales and feels this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should this change be made? Why or why not?

j.Return to the original data above. Management wants to automate a portion of the production process for SW. The new equipment would reduce labor costs by $20 per unit, but would result in a monthly rental cost of the new robotic machines of $10,000. Management further believes that the new equipment will increase the reliability and quality of SW, resulting in an increase in monthly sales in units of 12%. Should these changes be made? Why or why not?

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