Question

G Force Manufacturing Company had net income of $300,000 in 2017 when the number of units produced and sold was 6000 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:

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

2. 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.

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

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

5. Using the production/sales of 6,000 units, conduct a breakdown chart for G-Force Manufacturing Company, clearly showing the break-even 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 2 cm to represent $200,000 on the y-axis).

6. 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?

7. 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

(A)

(a) Selling price per unit = total sales revenue/total sales units

And,

(b) Total sales revenue = total variable cost + contribution margin

Total variable cost = total sales units x variable cost per unit

Variable cost per unit = $35 + $30 + $15 = $80

Therefore,

Total variable cost = 6000 x $80 = $480000

And,

Contribution margin = fixed cost + net income

Fixed cost = $232000 + $33000 + $155000 = $420000

Therefore,

Contribution margin = $420000 + $300000 = $720000

therefore,

total sales revenue = $480000 + $720000

= $1200000

therefore,

selling price per unit = $1200000/6000

= $200

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(B)

Contribution Margin Income Statement for the year ended December 31, 2017

Sales Less: variable cost		$1200000 $480000
Contribution margin Less: fixed cost Manufacturing overhead Advertising Administrative expenses Total fixed costs	$232000 $33000 $155000	$720000 $420000
Net income		$300000

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(C)

1. Break even point (units) = fixed cost/contribution margin per unit

Contribution margin per unit = contribution margin/sales units = $720000/6000 = $120

Therefore,

Break even point (units) = $420000/$120

= 3500 units

2. Break even point (dollar sales) = fixed cost/contribution margin ratio

Contribution margin ratio = contribution margin per unit/selling price per unit = $120/$200 = 0.6 or 60%

Therefore,

Break even point (dollar sales) = $420000/60%

= $700000

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(D)

1. Margin of safety (units) = total sales units - break even sales units

= 6000 - 3500

= 2500 units

2. Margin of safety (sales) = total sales - break even sales

= $1200000 - $700000

= $500000