198. Louis Company sells a single product at a price of $65 per unit. Variable costs per unit are $45 and total fixed costs are $625,500. Louis is considering the purchase of a new piece of equipment that would increase the fixed costs to $800,000, but decrease the variable costs per unit to $42.
Required:
If Louis Company expects to sell 44,000 units next year, should they purchase this new equipment?
Under the current system, Louis’ profit when 44,000 units are sold is
(($65 - $45) ´ 44,000) - $625,500 = $254,500
If the new equipment is purchased, Louis’ profit when 44,000 units are sold is
(($65 - $42) ´ 44,000) - $800,000 = $212,000
Louis is better off not buying the new equipment.
199. Cordell, Inc. has an operating leverage of 3. Sales are expected to increase by 9% next year. What is the expected change in operating income next year?
200. Explain how variable costing net income will be different than absorption costing net income under the following situations:
(1) A company had no beginning or ending inventory. During the year they produced and sold 10,000 units.
(2) A company had no beginning inventory. During the year they produced 10,000 units and sold 8,000 units.
(3) A company had 2,000 units in beginning inventory. During the year they produced 10,000 units and sold 12,000 units.