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Tire Inc. recorded the following information for November 2020: Sales $900,000 Manufacturing costs 630,000 Gross...

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Accounting

Tire Inc. recorded the following information for November 2020:

Sales $900,000

Manufacturing costs 630,000

Gross profit 270,000

Selling & administrative costs 180,000

Operating profit $ 90,000

The company manufactured and sold 15,000 units in November. Manufacturing costs are 40% variable and 60% fixed, while selling and administrative costs are 30% variable and 70% fixed. The company has significant unused capacity. The company is considering ways to improve profits. One option is to invest in new equipment that would allow Tire Inc. to automate part of its operations. Variable manufacturing costs would be reduced by $2.60 per unit, but fixed manufacturing costs would increase by $75,000 per month.

1. For both the current situation and the option described, calculate: a. The break-even point in units

b. Contribution margin percentage

c. The degree of operating leverage

d. The margin of safety

2. Referring to your calculations above, discuss whether or not you think the company should build the new factory. Your discussion should indicate that you have a clear understanding of what your calculations mean.

PLEASE SHOW YOUR WORK.

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