Advanced Corporation produces an electronic part, EL20, for mobile phones. Summary data from its 20x5 income statement are as follows:
Revenues $5,000,000
Variable costs 3,000,000
Fixed costs 2,160,000
Operating income $ (160,000)
Amy Wong, Advanced's president, is very concerned about Advanced Corporation's poor profitability. She asks Mark Lui, production manager, and Leslie Tsui, controller, to see if there are ways to reduce costs. After two weeks, Mark returns with a proposal to reduce variable costs to 52% of revenues by reducing the costs Advanced currently incurs for safe disposal of wasted metal. Leslie is concerned that this would expose the company to potential environmental liabilities. He tells Mark, ‘We would need to estimate some of these potential environment costs and include them in our analysis.' ‘You can't do that,' Mark replies.‘ We're not violating any laws. There's some possibility that we may have to incur environment costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we're in danger of shutting down the company and costing all of us our jobs. The only reason our competitors are making money is that they're doing exactly what I'm proposing.
Required:
a. Calculate Advanced Corporation's breakeven point for 20x5 in amount
b. Calculate Advanced Corporation's breakeven point in amount if variable costs are 52% of revenues.
c. Calculate Advanced Corporation's operating income for 20x5 if variable costs had been 52% of revenues.
d. Given Mark Lui's comments, what should Leslie Tsui do?