Problem: Austin, Inc., produces small-scale replicas of vintage automobiles. Finished products are built on a 1/20 scale of originals. The firm's income statement showed the following:
Revenues (1,500 units) . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . $840,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $378,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . 290,000
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . $ 88,000
A new automated stamping machine has been developed. If the new machine is leased, fixed expenses will increase by $30,000 per year. The firm's production capacity will increase, increasing sales volume by 20%. Labor costs will go down $28 per unit because of reduced polishing and finishing time.
Required:
Q1. Calculate the firm's current contribution margin ratio and break-even in revenues.
Q2. Recalculate the contribution margin ratio and breakeven in sales if the new machine is leased.
Q3. What is the firm's operating income assuming that the new machine is leased?
Q4. Should they lease the new machine? Why or why not?