Question

G-Force Manufacturing Company had net income of $300,000 in 2017 when the number of units produced and sold was 6,000 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:

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

ii) 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.

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

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

v) Using the production/sales of 6,000 units, construct a breakeven chart for G-Force Manufacturing Company, clearly showing the breakeven 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 2cm to represent $200,000 on the y-axis].

vi) 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?

vii) 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.) Sale Price Using Equation method
	Total Selling Price be "x" per unit
	→Sales - Variable Cost - FixedCost =Net Income
	→Sales = Variable Cost + Fixed Cost + Net Income
	→6000x = 6000(35+30+15) + (232000+33000+155000) + 300000
	→x = 1200000/6000
	→x = $200
	Hence Sale Price is $200 per unit
	ii)
	Contibution Margin Income Statement
	Sales			$       12,00,000
	Less : Variable Costs
	Direct Material			$          2,10,000
	Direct Labour			$          1,80,000
	Variable Manufacturing Overhead			$             90,000
	Contribution			$          7,20,000
	Less : Fixed Costs
	Manufacturing Overhead			$          2,32,000
	Advertising			$             33,000
	Administrative			$          1,55,000
	Net Income			$          3,00,000
	iii)
				= Fixed Cost/Contribution Margin
	Contribution Margin		=(200-35-30-15)/200
			=60%
	Break Even Point(in Sales)			=(232000+33000+155000)/60%
				=$700000
	Break Even Point(in Units)			=$700000/$200
				3500 Units
	iv)
	Margin of Safety(in Units)			=6000-3500
				2500 Units
	Margin of Safety(in Dollars)			=2500*$200
				$          5,00,000