Question

The vice-president of sales and marketing, Madison Tremblay, is trying to plan for the coming year in terms of production needs to meet the forecasted sales. The board of directors is very supportive of any initiatives that will lead to increased profits for the company in the upcoming year. Waterways markets a simple water controller and timer that it mass produces. During 2016, the company sold 407,500 units at an average selling price of $8 per unit. The variable expenses were $1,874,500, and the fixed expenses were $390,000.

What is the product’s contribution margin ratio? (Round answer to 2 decimal places, e.g. 25.15%.) Contribution margin ratio %

What is the company’s break-even point in units and in dollars for this product? (Round answers to 0 decimal places, e.g. 5,275.) Break-even point in units units Break-even point in dollars $

What is the margin of safety, both in dollars and as a ratio? (Round ratio to 2 decimal places, e.g. 25.25%.) Margin of safety in dollars $ Margin of safety ratio %

If management wanted to increase income from this product by 10%, how many additional units would the company have to sell to reach this income level? (Round answer to 0 decimal places, e.g. 5,275.) Waterways would have to sell an additional units

If sales increase by 85,000 units and the cost behaviours do not change, how much will income increase on this product? (Round answer to 0 decimal places, e.g. 5,275.) Income will increase by $

Waterways is considering mass producing one of its special-order screens. This would increase variable costs for all screens by an average of $0.85 per unit. The company also estimates that this change could increase the overall number of screens sold of 10%, and the average sales price would increase of $0.30 per unit. Waterways currently sells 590,090.0000000000 screen units at an average selling price of $28.00. The manufacturing costs are $8,236,214 variable and $2,460,170 fixed. Selling and administrative costs are $3,193,622 variable and $953,940 fixed. If Waterways begins mass producing its special-order screens, how would this affect the company? (Round percentage answers to 2 decimal places, e.g. 25.15% and other answers to 0 decimal places, e.g. 5,275.) Current New Effect Contribution margin ratio % % Decrease/Increase by % Operating income $ $ Increase/Decrease by $

If the average sales price per screen unit did not increase when the company began mass producing the screen units, what would be the effect on the company? (Round percentage answer to 2 decimal places, e.g. 25.15% and other answers to 0 decimal places, e.g. 5,275.) Contribution margin ratio will decrease/increase by %. Profit will decrease/increase by $ .

Answer 1

Answer :-

Sales (407,500*$8)	$3,260,000
(-) Varible Cost	$1,874,500
Contribution Margin	$1,385,500

1. Contribution Margin Ratio= Contribution Margin/Sales= $1,385,500/$3,260,000= 0.425 = 42.50 %

2. Break-even Point in Dollars= Fixed Cost/Contribution Margin Ratio = $390,000 /42.50%= $917,647

Break-even point in unit= Break-even point in dollars/selling price per unit= $917,647/$8= 114,706 units

3. Margin of safety in dollars= Total Sales- Break-even in dollars= $3,260,000 -$917,647 =$2,342,353

Margin of safety ratio= Margin of safety/Total sales= $2,342,353/$3,260,000 = 0.718 = 71.85 %

4. Existing Operating Income= Total Contribution-Fixed Cost= $1,385,500-$390,000 =$995,500

Revised Operating Income $1,095,050 [($995,500+$995,500*10%)= ($995,500+$99,550)

(+) Fixed Expenses $390,000

Desired Contribution $1,485,050/3.40*8

= 3,494,235

Additional sales = 3,494,235 - 3,260,000

= $234,235

Additional sales ( units) = 29,279.

234,235/8