Best Harmonica Company manufactures and sells harmonicas to distributors.

There are two problems this week. Click the tab at the bottom of the spreadsheet to move to problem 2.
Best Harmonica Company manufactures and sells harmonicas to distributors. The model they produce sells to the distributors for $8.00 each. Following are cost estimates:
Sales
Direct materials
Direct labor
Manufacturing overhead–variable
Manufacturing overhead–fixed
Selling expenses–variable
Selling expenses–fixed
Administrative expenses–variable
Administrative expenses–fixed

$3,480,000
543,750
761,250
152,250
640,000
78,300
300,000
47,850
185,000

Instructions
A.
B.
C.
D.
E.

Prepare a CVP income statement based on these cost estimates.
Commute contribution margin ratio.
Compute the break-even point in (1) units and (2) dollars.
Compute the margin of safety ratio.
Determine the sales dollars required to earn net income of $1,000,000.

Problem 2 involves a fixed asset decision.
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
Direct materials
Direct labor
Manufacturing overhead–variable
Manufacturing overhead–fixed
Selling expenses–variable
Selling expenses–fixed
Administrative expenses–variable
Administrative expenses–fixed

$4,500,000
780,000
1,540,000
364,500
750,000
90,000
250,000
60,000
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?