Question

The Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company’s profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them.

Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 721,000 units at an average selling price of $3.50 per unit. The variable costs were $1,766,450, and the fixed costs were $529,935.

-Contribution of margin Ratio= 30%

-Break Even point in Units=504,700

-Break Even Point in dollars=1,766,450

(A)What is the margin of safety, both in dollars and as a ratio? (Round ratio to 0 decimal places, e.g. 25%.)

(B)If management wanted to increase its income from this product by 10%, how many additional units would have to be sold to reach this income level?

(C)If sales increase by 51,000 units and the cost behaviors do not change, how much will income increase on this product?

Answer 1

--All working forms part of the answer

--Requirement A

A = 721000 units x $ 3.5	Total Sales	$2,523,500.00
B	Break Even Sales in dollars	$1,766,450.00
C = A - B	Margin of Safety in $	$757,050.00
D = (C/A) x 100	Margin of Safety ratio	30%

--Requirement B

A	Total Sales	$2,523,500.00
B	CM ratio	30%
C = A x B	Total Contribution margin	$757,050.00
D	Fixed Cost	$529,935.00
E = C - D	Current Net Income	$227,115.00
F = E x 10%	Increase in Net Income desired	$22,711.50
G = E+F	Total net income desired	$249,826.50
H = G + D	Total Contribution margin required	$779,761.50
I = C / 721000	Contribution margin per unit	$1.05
J = H/I	No. of units required to be sold	742,630
K	Units already being sold	721,000
L = J - K	Additional units to be sold	21,630

--Requirement C

A	Increase in units	51,000
B = A x $ 3.5	Increase in Sales	$178,500.00
C	CM Ratio	30%
D = B x C	Increase in Net Income	$53,550.00