Ellio± Incorporated manufactures garden tools, and although the manufacturing equipment is per2. Upgrading to modern equipment would speed up the manufacturing process such that direct labowould be reduced by 40% on a per-unit basis.
| This is a comprehensive problem all contained on this spreadsheet tab. | |
| 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 | $4,500,000 |
| Direct materials | 780,000 |
| Direct labor | 1,540,000 |
| Manufacturing overhead–variable | 364,500 |
| Manufacturing overhead–fixed | 750,000 |
| Selling expenses–variable | 90,000 |
| Selling expenses–fixed | 250,000 |
| Administrative expenses–variable | 60,000 |
| Administrative expenses–fixed | 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? | |
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