Shonda & Shonda is a company that does land surveys and engineering consulting.  They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly.  The new equipment will cost them an additional $1,200 per month, but they will be able to increase their sales by 10% per year.  Their current annual cost and break-even figures are as follows: Units sold                                  1,400 Sales price per unit                    $225 Variable cost per unit                 $145 Fixed costs                                 $52,000 Break-even (in units)                   650 Contribution margin ratio         $0.36 Break-even (in dollars)               $146,250   Sales                                          $315,000 Variable costs                            $203,000 Fixed costs                                $52,000 Net Income (loss)                      $60,000   1.  What will be the impact on the break-even point if Shonda & Shonda purchases that new computer? 2.  What will be the impact on net operating income if Shonda & Shonda purchases the new computer? 3.  What would be your recommendation to Shonda & Shonda regarding this purchase?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

Shonda & Shonda is a company that does land surveys and engineering consulting.  They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly.  The new equipment will cost them an additional $1,200 per month, but they will be able to increase their sales by 10% per year.  Their current annual cost and break-even figures are as follows:

Units sold                                  1,400

Sales price per unit                    $225

Variable cost per unit                 $145

Fixed costs                                 $52,000

Break-even (in units)                   650

Contribution margin ratio         $0.36

Break-even (in dollars)               $146,250

 

Sales                                          $315,000

Variable costs                            $203,000

Fixed costs                                $52,000

Net Income (loss)                      $60,000

 

1.  What will be the impact on the break-even point if Shonda & Shonda purchases that new computer?

2.  What will be the impact on net operating income if Shonda & Shonda purchases the new computer?

3.  What would be your recommendation to Shonda & Shonda regarding this purchase?

 

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 2 images

Blurred answer
Knowledge Booster
Relevant cost analysis
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education