Reference no: EM132595121

Question - Calibrated Manufacturing makes an electronic component that is in great demand. The component sells for $20 each. Calibrated's current capacity is 10,000 units per week. For the last few months, however, the company has been receiving new orders at a rate of 14,000 units per week, and now has a substantial backlog. The company expects this order rate to continue, if it maintains its price. Calibrated's current operating data follows:

Sales Revenue $200,000

Variable Costs 100,000

Fixed Costs 80,000

Pretax Profit 20,000

For each incremental addition of 500 units of output weekly, Calibrated would need to purchase new equipment that would add $1500 to weekly fixed costs. No other fixed costs would become incremental for this price change. Labor costs currently account for half of all variable costs. Additional hires, however, are expected to be more costly than the average of current employees because of their lower productivity. Although new hires are paid (wages + fringe benefits) only 80% of the current average, they can produce only two-thirds as much output per hour). Consequently, labor costs for additional output with new hires is 20% higher than the current average.

Calibrated is debating whether to keep its current price and expand to meet the demand or to raise its price to reduce demand somewhat before deciding whether or not to expand.

How much would Calibrated's weekly profits increase if it expanded to meet the entire amount of its current excess demand?

How do you calculate an analysis of a 10% price increase.

Calculate the break-even sales quantity (percent and units).

Calculate the new $ contribution margin per unit.

Develop a break-even table showing the change in Profit Contribution for changes in sales between -5% and -30%. First, you will need to determine first:

What is the baseline "initial sales" from which you are beginning?

From that baseline, how would you treat the semi-fixed costs?

Are they additions to cost (positive numbers) or are they savings (negative numbers)?

What does the column labeled "Change in Profit Contribution" mean here? What is it a change from?

If Calibrated believes that orders will fall off by no more than 15% following a 10% price increase, should it go through with the price increase or should it hold the price constant and meet all the excess demand with an increase in production?

What risks might be to Calibrated of increasing price to maximize profit?

What risks might there be to Calibrated of expanding output rather than reducing demand through a price increase?