Question

G Force Manufacturing Company had net income of $300,000 in 2017 when the number of units produced and sold was 6000 and data for variable and fixed costs were as follows:

Cost Schedule

Variable Costs:          Direct Material                                           $35

                                    Direct Labour                                         $30

                                    Variable Manufacturing Overhead            $15

Fixed Costs:               Manufacturing Overhead                                          $232,000

                                    Advertising                                                                   33,000

                                    Administrative                                                                     155,000

Required:

1. Compute the selling price per unit in 2017, using the equation method.

2. Using the sales price per unit calculated in (i), prepare a contribution margin income statement for the year ended December 31, 2017, detailing the components of total fixed costs and clearly showing contribution and net income.

3. Calculate G-Force’s break-even point in units and in dollars.

4. Calculate the margin of safety in number of units and sales dollars.

5. Using the production/sales of 6,000 units, construct a breakeven chart for G-Force Manufacturing Company, clearly showing the break-even point and the margin of safety in units and dollars and the region representing profits and losses. (Use a scale of 2 cm to represent 1,000 units on the x-axis and 2 cm to represent $200,000 on the y-axis).

6. The president of G-Force Manufacturing is under pressure from stockholders to increase operating income by 10% in 2018. Management expects per unit data and total fixed costs to remain the same in 2018. Compute the number of units that must be sold in 2018 to reach the shareholders’ desired profit level. Is this a realistic goal?

7. Assume that G-Force Manufacturing sells the same number of units in 2018 as it did in 2017. Assuming unit variable costs and total fixed costs remain unchanged, what would the new selling price have to be in order to reach the stockholders desired profit level?

Answer 1

i. Selling price as per Equation Method:

Selling price = (Total Fixed Cost/Total Units Produce) + Variable Cost per Unit + Net Profit per Unit

Selling price     = ($ 4,20,000/6000)+$ 80 + $ 50

                        = $ 70 + $ 80 + $ 50

                        = $ 200/-

Note 1:

Calculation of Total Fixed Cost= Manufacturing Overhead + Advertising + Administrative

              Total Fixed Cost     = $ 2,32,000 + $ 33,000 + $ 1,55,000

                                           = $ 4,20,000/-

Note 2:

Calculation of Variable Cost per Unit = Direct Material + Direct Labour + Variable Manufacturing Overhead

Variable Cost per Unit = $ 35 + $ 30 + $ 15

                                  = $ 80/-

Note 3:

Net Profit per Unit = Net Income/ No of Unit Produce

                        = $ 3,00,000/6,000

                        = $ 50/-

ii) Following are the contribution margin income statement for the year ended December 31, 2017

	Particulars	Amount
	Sales	$ 12,00,000/-
Less	Total Variable production expenses	$ 4,80,000/-
Equal	Contribution margin	$ 4,20,000/-
Less	Total Fixed production expenses	$ 4,20,000/-
	Net profit	$ 3,00,000/-

    

Note 1:

Sales      = No. of Units Produce * Selling Price Per Unit

              = 6,000 * $ 200/-

              = $ 12,00,000/-

Note 2:

Total Variable production expenses = (Direct Material + Direct Labour + Variable Manufacturing Overhead) * No. of Units Produce

                                  = ($ 35 + $ 30 + $ 15) * 6,000

                                  = $ 80 * 6,000

                                  = $ 4,80,000/-

Note 3:

Total Fixed production expenses = (Manufacturing Overhead + Advertising + Administrative)

                                           = ($ 2,32,000 + $ 33,000 + $ 1,55,000)

                                           = $ 4,20,000/-

iii) Calculation of Break Even Point

1. Unit Break Even Point = Fixed Cost/ (Price Per Unit – Variable Cost Per Unit)

= $ 4,20,000 / ($ 200 - $ 80)

= 3500 Units

At break-even point the profit is zero.

2. Sales Break Even Point = Price per Unit * Break-even Sales Units

= $ 200 * 3500

= $ 7,00,000/-

         

iv) Calculation of Margin of Safety

1. Margin of safety in dollars = Current sales – Breakeven sales

= $ 12,00,000 - $ 7,00,000

= $ 5,00,000/-

2. Margin of safety in units = Current sales units – Breakeven point

= 6,000 – 3,500

= 2,500 Units