Question

Luxvano Co. produced and sold 65,000 units during the year at an average price of $20 per unit. Variable manufacturing costs were $9 per unit, and variable marketing costs were $3 per unit sold. Fixed costs amounted to $220,000 for manufacturing and $80,000 for marketing. There was no year-end work-in-process inventory. Assume the income tax rate of 40%.

(SHOW WORK)

a. compute luvano's break-even point in sales dollars for the year

b.compute the margin of safety in units

c. compute the operating income (income before taxes)

d. compute the sales units required to earn a net income (income after taxes) of $120,000 during the year

e. If Luvano's variable manufacturing costs are expected to increase by 10% in the coming year, compute the selling price that would yield the same current contribution margin ration in the coming year

f. compute the required sales units to achieve operating income of 20% of sales revenue

Answer 1

a.

Break even point in sales dollars = Fixed costs / Contribution margin ratio

Contribution margin ratio = Contribution margin / Sales *100

Contribution margin ratio = $20 - 9 - 3 / $20 *100 = 40%

Break even point in sales dollars = $220,000+80,000 / 40% = $750,000

b.

Margin of safety in units = Current unit sales - Break even units sales

Break even units sales = $750,000 / $20 = 37,500 units

Margin of safety in units = 65,000 - 37,500 = 27,500 units

c.

Operating income = Contribution margin - Fixed costs

Operating income = $520,000 (65,000*$8) - $300,000 = $220,000

d.

Desired sales units = Fixed cost + Net income before tax / Contribution margin per unit

Desired sales units = $300,000 + 200,000 (120,000/60%) / $8

Desired sales units = $500,000 / $8 = 62,500 units

e.

Revised variable manufacturing cost = $9+10% = $9.9 per unit

Current contribution margin ratio = 40%

Desired selling price to yield same contribution margin ratio = $9.9+$3 / 60%(100-40) = $21.5

f.

Let Desired sale unit be X

X = $300,000 + $4X (X*$20*20%) / $8

$8X - $4X = $300,000

$4X = $300,000

X = $300,000 / $4 = 75,000 units

Desired sales units = 75,000 units