Question - Brazen, Inc. produces sound amplifiers for electric guitars. The firm's income statement showed the following:
Revenue (8,400 Units) $504,000 100%
Variable Expense (302, 400) 60%
Contribution Margin $201, 600 40%
Fixed expense (140, 400)
Operating income $61,200
An automated machine has been developed that can produce several components of the amplifiers. If the machine is purchased, fixed expenses will increase to $315,000 per year. The firm's production capacity will increase, which is expected to result in a 25 percent increase in sales volume. It is also estimated that the variable expense ratio will be reduced to half of what it is now.
REQUIRED: (You must show all your work otherwise no credit will be given)
(a) Calculate the firm's current contribution margin per unit and break-even point in units.
(b) Calculate the firm's contribution margin per unit and break-even point in terms of units if the new machine is purchased.
(c) Calculate the firm's operating income assuming that the new machine is purchased.
(d) Do you believe that management of Brazen, Inc. should purchase the new machine? Explain your answer.