Baskota Ltd. produces a moulded plastic casing MP356 for desktops. Summary data for 2020 income statement are as follows:
|$5 000 000
|3 000 000
|2 160 000
James Woodruff, CEO, is very concerned about the company’s poor profitability. He asks Matt Vogue, production manager, and Laila Homes, management accountant, to see if there are ways to reduce costs.
After two weeks, Matt returns with a proposal to reduce variable costs to 52% of revenues by reducing the costs the company currently incurs for safe disposal of wasted plastics. Laila is concerned that this would expose the company to potential environmental liabilities. She tells Matt: “We would need to estimate some of these potential environmental costs and include them in our analysis.” “you can’t do that” Matt 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”.
- What is Baskota’ s break-even revenue for 2020?
- What is Baskota’ s break-even revenue if variable costs are 52% of revenues?
- What is Baskota’ s profit for 2020 if variable costs had been 52% of revenues?
- Given Matt’s comments, what do you think Laila should do? Give reasons for your answer.
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