Question

Anwar Ltd produces a molded plastic casing, LX201, for desktop computers. Summary data from its 2014 income statement are as follows: Revenues: $5,000,000 Variable costs: $3,000,000 Fixed costs: $2,160,000 Operating profit: $(160,000) Jane Woodall, Anwar's CEO, is very concerned about the company's poor profitability. She asks Max Wilson, production manager, and Lyle Hayes, management accountant, to see if there are ways to reduce costs. After two weeks, Max returns with a proposal to reduce variable costs to 52% of revenues by reducing the costs Anwar Ltd currently incurs for safe disposal of wasted plastic. Lyle is concerned that this would expose the company to potential environmental liabilities. He tells Max, "We would need to estimate some of these potential environmental costs and include them in our analysis." "You can't do that," Max replies. "We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company. We don't want all our colleagues to lose their jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing." Required: a) Calculate Anwar Ltd's break-even revenues for 2014. b) Calculate Anwar Ltd's break-even revenues if variable costs are 52% of revenues. c) Calculate Anwar Ltd's profit for 2014 if variable costs had been 52% of revenues. d) Given Max Wilson's comments, what should Lyle Hayes do?

Anwar Ltd produces a molded plastic casing, LX201, for desktop computers. Summary data from its 2014 income statement are as follows:
Revenues: $5,000,000
Variable costs: $3,000,000
Fixed costs: $2,160,000
Operating profit: $(160,000)

Jane Woodall, Anwar's CEO, is very concerned about the company's poor profitability. She asks Max Wilson, production manager, and Lyle Hayes, management accountant, to see if there are ways to reduce costs.

After two weeks, Max returns with a proposal to reduce variable costs to 52% of revenues by reducing the costs Anwar Ltd currently incurs for safe disposal of wasted plastic. Lyle is concerned that this would expose the company to potential environmental liabilities. He tells Max, "We would need to estimate some of these potential environmental costs and include them in our analysis."

"You can't do that," Max replies. "We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company. We don't want all our colleagues to lose their jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing."

Required:
a) Calculate Anwar Ltd's break-even revenues for 2014.
b) Calculate Anwar Ltd's break-even revenues if variable costs are 52% of revenues.
c) Calculate Anwar Ltd's profit for 2014 if variable costs had been 52% of revenues.
d) Given Max Wilson's comments, what should Lyle Hayes do?

Added by Wendy J.

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