Marco Manufacturers has a current unit selling price of $120 with a unit variable cost of $70 and total fixed costs of $60,000. At its current production level of 1,000 units, it is experiencing a net loss of $10,000. The company is trying to plan a strategy for the upcoming year that will result in a profit. It is considering the following options while maintaining the same current production of 1,000 units:
Option 1: Outsource some of its parts' production. The external unit price (unit cost) will only result in cost-savings of $20 in unit variable cost but $5,000 in fixed costs can be saved ($55,000 of fixed costs will still be incurred)
Option 2: Move to automating most of the production, which will result in a significant cut the unit variable cost, reducing it to $40 per unit, but increasing the total fixed costs to $68,000. Using a contribution margin income statement format, determine which option appears to be the best for Marco Manufacturers. (Highest net income)

Question

Marco Manufacturers has a current unit selling price of $120 with a unit variable cost of $70 and total fixed costs of $60,000. At its current production level of 1,000 units, it is experiencing a net loss of $10,000. The company is trying to plan a strategy for the upcoming year that will result in a profit. It is considering the following options while maintaining the same current production of 1,000 units:
Option 1: Outsource some of its parts' production. The external unit price (unit cost) will only result in cost-savings of $20 in unit variable cost but $5,000 in fixed costs can be saved ($55,000 of fixed costs will still be incurred) 
Option 2: Move to automating most of the production, which will result in a significant cut the unit variable cost, reducing it to $40 per unit, but increasing the total fixed costs to $68,000. Using a contribution margin income statement format, determine which option appears to be the best for Marco Manufacturers. (Highest net income)

Quizplus · Accepted Answer

The Answer of Marco Manufacturers has a current unit selling price of $120 with a unit variable cost of $70 and total fixed costs of $60,000. At its current production level of 1,000 units, it is experiencing a net loss of $10,000. The company is trying to plan a strategy for the upcoming year that will result in a profit. It is considering the following options while maintaining the same current production of 1,000 units:
Option 1: Outsource some of its parts' production. The external unit price (unit cost) will only result in cost-savings of $20 in unit variable cost but $5,000 in fixed costs can be saved ($55,000 of fixed costs will still be incurred) 
Option 2: Move to automating most of the production, which will result in a significant cut the unit variable cost, reducing it to $40 per unit, but increasing the total fixed costs to $68,000. Using a contribution margin income statement format, determine which option appears to be the best for Marco Manufacturers. (Highest net income)

Marco Manufacturers Has a Current Unit Selling Price of $120