Question

Henry Hawkins Industries of Batavia, Ohio, manufactures and sells one product. The company assembled the following projections for its first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	20
Direct labor	$	16
Variable manufacturing overhead	$	4
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	450,000
Fixed selling and administrative expenses	$	70,000

During its first year of operations Henry Hawkins expects to produce 25,000 units and sell 20,000 units. The budgeted selling price of the company’s only product is $66 per unit.

Required:

(answer each question independently by referring to the original data):

1. Assuming that Henry Hawkins' projections are accurate, what will be its absorption costing net operating income (loss) in its first year of operations?

2. Henry Hawkins is considering investing in a higher quality raw material that will increase its direct materials cost by $1 per unit. It estimates that the higher quality raw material will increase sales by 1,000 units. What will be the company’s revised absorption costing net operating income (loss) if it invests in the higher quality raw material and continues to produce 25,000 units?

3. Henry Hawkins is considering raising its selling price by $1.00 per unit with an expectation that it will lower unit sales by 1,500 units. What will be the company’s revised absorption costing net operating income (loss) if it raises its price by $1.00 and continues to produce 25,000 units?

4. Assuming that Henry Hawkins' projections are accurate, what will be its variable costing net operating income (loss) in its first year of operations?

5. Henry Hawkins is considering investing in a higher quality raw material that will increase its direct materials cost by $1 per unit. It estimates that the higher quality raw material will increase sales by 1,000 units. What will be the company’s revised variable costing net operating income (loss) if it invests in the higher quality raw material and continues to produce 25,000 units?

6. Henry Hawkins is considering raising its selling price by $1.00 per unit with an expectation that it will lower unit sales by 1,500 units. What will be the company’s revised variable costing net operating income (loss) if it raises its price by $1.00 and continues to produce25,000 units?

7. What is Henry Hawkins' break-even point in unit sales? What is its break-even point in dollar sales?

8. What is the company’s projected margin of safety in its first year of operations?

Answer 1

Fixed Manufacturing cost = $450000
Per unit = $450000 /25000 = $18

1.

Income Statement
Sales Revenue	$ 1,320,000.00
Cost of Goods Sold	$ 1,160,000.00
Gross Profit	$     160,000.00
Selling and administrative expenses	$     110,000.00
Net Income	$       50,000.00
Product Cost
Direct Material	$               20.00
Direct Labor	$               16.00
Variable Manufacturing Overhead	$                  4.00
Fixed Manufacturing Overhead	$               18.00
Total	$               58.00
Total Cost of Goods Sold
for 20000 units	$ 1,160,000.00

2.

Income Statement
Sales Revenue	$ 1,386,000.00
Cost of Goods Sold	$ 1,239,000.00
Gross Profit	$     147,000.00
Selling and administrative expenses	$     112,000.00
Net Income	$       35,000.00
Product Cost
Direct Material	$               21.00
Direct Labor	$               16.00
Variable Manufacturing Overhead	$                  4.00
Fixed Manufacturing Overhead	$               18.00
Total	$               59.00
Total Cost of Goods Sold
for 21000 units	$ 1,239,000.00

3.

Income Statement
Sales Revenue	$ 1,239,500.00
Cost of Goods Sold	$ 1,073,000.00
Gross Profit	$     166,500.00
Selling and administrative expenses	$     107,000.00
Net Income	$       59,500.00
Product Cost
Direct Material	$               20.00
Direct Labor	$               16.00
Variable Manufacturing Overhead	$                  4.00
Fixed Manufacturing Overhead	$               18.00
Total	$               58.00
Total Cost of Goods Sold
for 18500 units	$ 1,073,000.00

4.

Variable Costing Income Statement
Sales Revenue		$     1,320,000.00
Variable Cost of Goods Sold
Direct Material	$     400,000.00
Direct Labor	$     320,000.00
Variable Manufacturing Overhead	$       80,000.00
Total Cost of Goods Available for sale	$     800,000.00
Less : Closing Stock (5000 x $40)	$     200,000.00	$        600,000.00
Gross Contribution margin		$        720,000.00
Less : variable Selling & Admn Exp		$           40,000.00
Contribution Margin		$        680,000.00
Fixed Expenses
Manufacturing Overhead	$     450,000.00
Selling & Admn Exp	$       70,000.00	$        520,000.00
Net Income		$        160,000.00

5.

Variable Costing Income Statement
Sales Revenue		$     1,386,000.00
Variable Cost of Goods Sold
Direct Material	$     441,000.00
Direct Labor	$     336,000.00
Variable Manufacturing Overhead	$       84,000.00
Total Cost of Goods Available for sale	$     861,000.00
Less : Closing Stock (4000 x $41)	$     164,000.00	$        697,000.00
Gross Contribution margin		$        689,000.00
Less : variable Selling & Admn Exp		$           42,000.00
Contribution Margin		$        647,000.00
Fixed Expenses
Manufacturing Overhead	$     450,000.00
Selling & Admn Exp	$       70,000.00	$        520,000.00
Net Income		$        127,000.00

6.

Variable Costing Income Statement
Sales Revenue		$     1,239,500.00
Variable Cost of Goods Sold
Direct Material	$     370,000.00
Direct Labor	$     296,000.00
Variable Manufacturing Overhead	$       74,000.00
Total Cost of Goods Available for sale	$     740,000.00
Less : Closing Stock (6500 x $40)	$     260,000.00	$        480,000.00
Gross Contribution margin		$        759,500.00
Less : variable Selling & Admn Exp		$           37,000.00
Contribution Margin		$        722,500.00
Fixed Expenses
Manufacturing Overhead	$     450,000.00
Selling & Admn Exp	$       70,000.00	$        520,000.00
Net Income		$        202,500.00

7. Contribution Margin per unit = $680000 / 20000 = $34
Break Even Point in units = Fixed Expenses / Contribution Margin per unit
= $520000 / $34 = 15295 units

in Dollars = 15295 x $66 = $1009470

8. Margin of Safety = Actual Sales - Break Even Sales
= $1320000 - $1009470 = $310530