Question

The PC Supply manufactures memory cards that sell to wholesalers for $2.00 each. Variable and fixed costs are as follows: Variable Costs per card Fixed Costs per Month Manufacturing Direct materials $0.30 Direct labor 0.25 Factory overhead 0.25 0.80 Factory overhead $4,000 Selling and admin. 0.15 Selling and admin. 3,000 Total $0.95 Total $7,000 PC Supply produced and sold 10,000 cards during October 2010. There were no beginning or ending inventories.

a. Prepare a contribution income statement for the month of October.

b. Determine PC Supply’s monthly break-even point in units.

c. Determine the effect on monthly profit of a 1,100 unit increase in monthly sales.

d. If PC Supply is subject to an income tax of 28 percent, determine the dollar sales volume is required to earn a monthly after-tax profit of $22,000.

Answer 1

a	PC Supply
	Contribution Margin Income Statement
	For the Month Ended
	Units		10,000
	Sales		$20,000
	Less: Variable cost of goods sold ($0.30 + $0.25 + $0.25)		$8,000
	Manufacturing margin		$12,000
	Variable Selling and administrative expenses		$1,500
	Contribution margin		$10,500
	Fixed costs:
	Fixed factory overhead	$4,000
	Fixed Selling and administrative expenses	$3,000
	Total fixed costs		$7,000
	Operating Income		$3,500
b
	Break even point =Fixed cost/ Contribution margin per unit/components
	$7,000/$1.05
	6,667 units
c	PC Supply
	Contribution Margin Income Statement
	For the Month Ended
	Units		11,100
	Sales		$22,200
	Less: Variable cost of goods sold ($0.30 + $0.25 + $0.25)		$8,880
	Manufacturing margin		$13,320
	Variable Selling and administrative expenses		$1,665
	Contribution margin		$11,655
	Fixed costs:
	Fixed factory overhead	$4,000
	Fixed Selling and administrative expenses	$3,000
	Total fixed costs		$7,000
	Operating Income		$4,655
d	35,767 units
	Let units of z to require after-tax profit of $22,000, So
	($1.05z - $7,000) x (1 - 0.28) = $22,000
	$0.756z - $5,040 = $22,000
	z = 35,767
	PC Supply
	Contribution Margin Income Statement
	For the Month Ended
	Units		35,767
	Sales		$71,534
	Less: Variable cost of goods sold ($0.30 + $0.25 + $0.25)		$28,614
	Manufacturing margin		$42,920
	Variable Selling and administrative expenses		$5,365
	Contribution margin		$37,555
	Fixed costs:
	Fixed factory overhead	$4,000
	Fixed Selling and administrative expenses	$3,000
	Total fixed costs		$7,000
	Operating Income before tax		$30,555
	Less: Tax		$8,555
	Operating Income After tax		$22,000