Question

The company Volar inc. manufactures and sells a single answering machine. Here are the results established using the variable cost method for the most recent period.

	Total	Per unit	Percentage of sales
Sales (20,000 units)	1 200 000 $	60 $	100%
Less: variable costs	900 000	45	25%
Variable cost margin	300 000	15	75%
Less: fixed costs	240 000
Profit	60 000 $

Work to do :

1) Calculate the breakeven point (in units and dollars) of Voltar inc. for the last period.

2) Assume an increase in sales of $ 400,000 in the following period. If the patterns of cost behavior remain the same, by how much will the company's profit increase?

3) Use the starting data again. Suppose management wants the company’s minimum profit to be $ 90,000 in the next period. How many units will the company have to sell to achieve this goal?

4) Use the starting data again. Calculate the company's safety margin in units and dollars.

5) Go back to the starting point. In an effort to increase sales and profits, the company is considering the possibility of using higher quality speakers. This would have the effect of increasing variable costs by $ 3 per unit. However, management could do without the services of a quality inspector, who receives an annual salary of $ 30,000. According to the sales manager, this quality speaker would increase annual revenues by 20%.

a) Calculate the new breakeven point in units and dollars.
b) Assuming the changes described above take place, prepare a forecast of income for the next period.
c) Would you recommend that these changes be implemented?

Please answer all the questions if possible, Question 5 is more urgent

Answer 1

1. Break even point in units and dollars

Break even point in units = Fixed cost / Contribution margin per unit

Fixed cost = $240,000

Contribution margin (variable cost margin) per unit = $15

Break even point in units = $240,000 / $15 = 16,000 units

Break even point in dollars = Fixed cost / Contribution margin ratio

Contribution margin ratio = Contribution margin(variable cost margin) / Sales

= $300,000 / $1,200,000 = 0.25

Break even point in dollars = $240,000 / 0.25 = $960,000

2. Sales has increased by $400,000. increase in profit = ?

Increase in sales = $400,000

Total sales = $1,200,000 + $400,000 = $1,600,000

Contribution margin ratio = 0.25 (does not change as the cost behaviour remain same)

So, total contribution margin (variable cost margin) = Total sales * contribution margin ratio

= $1,600,000 * 0.25 = $400,000

Profit = Contribution margin - fixed cost = $400,000 - $240,000 = $160,000

The earlier profit was $60,000. Now it is $160,000.

So, if sales increases by $400,000, profit also increases by $100,000

3. Unit sales required to earn a profit of $90,000.

Required sales in units = (Fixed cost + target profit) / Contribution margin per unit

Fixed cost = $240,000

Target profit = $90,000

Contribution margin per unit(variable cost margin) = $15

Required sales in units = ($240,000 + $90,000) / $15 = $330,000 / $15 = 22,000 units

22,000 units have to be sold to earn a minimum profit of $90,000

4.Safety margin in units and dollars

Safety margin is also known as margin of safety

Safety margin in dollars = Actual sales - break even point in dollars

Actual sales = $1,200,000 Break even point in dollars = $960,000

Safety margin in dollars = $1,200,000 - $960,000 = $240,000

safety margin in units = Actual sales in units - break even point in units

Actual sales in units = 20,000 units Break even point in units = 16,000 units

Safety margin in units = 20,000 - 16,000 = 4,000 units

5. a. new break even point in units and dollars

As per the the question, the variable cost will increase by $3.

The salary paid to the quality inspector is a fixed cost. So fixed cost also increases by $30,000.

Break even point in units = Fixed cost / Contribution margin per unit

fixed cost = $240,000 + $30,000 = $270,000

Contribution margin = Selling price - variable cost

Selling price = $60, Variable cost = $45 + $3 = $48

Contribution margin = $60 - $48 = $12

Break even point in units = $270,000 / $12 = 22,500 units

Break even point in dollars = Fixed cost / contribution margin ratio

Contribution margin ratio = Contribution margin / Selling price = $12 / $60 = 0.2

Break even point in dollars = $270,000 / 0.2 = $1,350,000

5.b.Forecast income for the next period

Increase in sales revenue = 20%

So sales = $1,200,000 +(1,200,000*20%) = $1,200,000 + $240,000 = $1,440,000

Number of units sold = sales / selling price =$1,440,000 / $60 = 24,000 units

Calculation of income:

		notes:
Sales	$1,440,000
Less:Variable cost	($1,152,000)	24,000*48
=Contribution margin/variable cost margin	$288,000
Less fixed cost	($270,000)
Net income	$18,000

5.c. No, these changes can't be implemented. See the profit has decreased from $60,000 to $18,000.

And also, the break even point in dollars has increased by $390,000 ($1,350,000 - $960,000).

But the annual revenue has increased by $240,000(20% of $1,200,000). Thisis not enough to cover the increase in break even point in dollars.