Question

Ivanhoe Corporation has collected the following information after its first year of sales. Sales were $1,600,000 on 100,000 units, selling expenses $220,000 (40% variable and 60% fixed), direct materials $510,000, direct labor $290,200, administrative expenses $278,000 (20% variable and 80% fixed), and manufacturing overhead $366,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.

Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)

(1)       Contribution margin for current year       $
Contribution margin for projected year     $
(2)       Fixed Costs $

Compute the break-even point in units and sales dollars for the current year.

1) Break-even point in units units
2) Break-even point in dollars $

If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 10.5.)

1) Margin of safety ratio %

Answer 1

1)

Particulars		Current year (Amount)	Projected year (Amount)
Sales		1,600,000.00	1,760,000.00
Less: Variable cost
Direct Material	510,000.00
Direct Labor	290,200.00
Manufacturing Overhead (366000*70%)	256,200.00
Admin Overhead (278000*20%)	55,600.00
Selling Overhead (220000*40%)	88,000.00	1,200,000.00	1,320,000.00
Contribution Margin		400,000.00	440,000.00

2)

FIxed cost		Current year Amount
Manufacturing Overhead (366000*30%)	109,800.00
Admin Overhead (278000*80%)	222,400.00
Selling Overhead (220000*60%)	132,000.00	464,200.00

Breakeven Point

1) Breakeven Point in units = Fixed Cost / Contribution Margin per unit

= 464,200 / (400,000/100,000)

= 116,050 units

2) Breakeven Point in dollars = Fixed Cost / Contribution Margin * Sales

= 464,200 / 400,000 * 1,600,000

= $1,856,800

Sales for Target Profit

Sales for Target Profit = (Fixed cost + target profit) / Contribution Margin * Sales

= (464,200 + 204,000) / 400,000 * 1,600,000

= $2,672,800

Margin of Safety Ratio

Margin of Safety Ratio = (Actual Sales - Break even sales) / Actual sales

= (2,672,800 - 1,856,800) / 2,672,800

= 30.5%