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
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Chapter1: Financial Statements And Business Decisions
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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?

 

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