Profit Planning and Strategic Considerations Because of competitive pressures and potential

Profit Planning and Strategic Considerations Because of competitive pressures and potential increases in product quality, your company is evaluating whether it should replace an existing piece of machinery that is used in the manufacture of a key product produced by the company. Because of anticipated decreases in manufacturing cycle time and increases in product quality, you anticipate that, if the company purchases the new machine, it would be able to increase the selling price for the product. Baseline budgeted data are as follows:

Product-Related Information

Sales price per unit Existing Machine

$ 15.00 New Machine

$ 17.50

Variable cost per unit

$ 12.00

$ 12.00

Fixed costs per month

$100,000

$200,000

Required

What is the monthly breakeven volume for each of the two decision alternatives?

Assume that in the past the company’s targeted ratio of operating profit to sales was 12 percent. What sales level, in units per month, would the company have to generate for each alternative in order to meet this stated profitability target?

In evaluating this investment proposal, management is interested in knowing the monthly sales volume (in units) at which the two decision alternatives yield the same operating profit (in dollars). Determine what this monthly volume is. Construct a graph to depict the operating profit equation for each decision alter- native. Be sure to fully label the graph, to include the profit equation for each alternative, the breakeven point for each alternative, and the volume level at which the company would be indifferent between the two alternatives.

What strategic factors or considerations might affect the decision as to whether the company should keep or replace the existing equipment?