Calculation Of Contribution Margin Ratio And Breakeven Point

Question

Alpha Company, which sells specially designed envelopes has been in the industry for almost then years. The company’s profit and loss account for the month of December 2012 is given below:

Alpha Company
Profit and Loss Account for December 2012  
                                                      €
Sales (21,500 units)                1720,000
Less: Variable Costs                   967500
                                              ________
Contribution                               752500
Less: Fixed Costs                       780000
                                              ________
Net Loss                                      27500

The printing manager suggests that by automating part of the printing process, variable costs can be reduced by €10 per unit. This proposal will lead to an increase in depreciation expenses by €184,000 each month.

1. Compute the new contribution margin ratio and the new breakeven point in units (round up to the nearest unit).
2. Would you recommend that the company automate its operations? Please explain.

Summary

The question belongs to Finance and it discusses about a scenario of a business which yields a net loss. Contribution margin ratio and breakeven point in units and automation of company’s operations have been discussed in the solution.

Total Word Count 100