The May 2011 income statement for Barbex Company is given below: Sales (10,000 units) $100,000 Less variable costs 70,000 Contribution margin 30,000 Less fixed costs 24,000 Net income $6,000 The Barbex Company has ample unused capacity and is studying various ways of improving profits. Required: Each of the situations below is independent of the other. Provide the information requested. 1. New equipment has come onto market that would allow Barbex Company to automate a portion of its operations. Variable costs could be reduced by $3 per unit. However, fixed costs would increase by $30,000 each month. Firstly, prepare two contribution-type income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased. Secondly, as a manager, what factors would be paramount in your mind in deciding whether to purchase the new equipment? Explain. 2. Refer to the original data. Barbex Company is thinking about changing its marketing method. Under the new method sale would increase by 15 percent each month, and net income would increase by one third. Fixed cost could be slashed to only $15,000 per month. Calculate the break-even point for the company before and after the change in marketing method. Refer to the original data. Due to a sudden and unprecedented surge in demand, the company’s sales increased by 25 percent during June 2011. During that month, net income increased by $3,000, or by 50 percent. By how much should net income have increased? Would you congratulate management for an outstanding performance, or would you chastise management for not doing its job well during the period? Explain.
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