Question

Q1) Pennell Company gathered the following information for the year ended December 31, 2014:

Fixed costs:
Manufacturing	$300,000
Marketing	100,000
Administrative	50,000
Variable costs:
Manufacturing	$230,000
Marketing	90,000
Administrative	100,000

During the year, Pennell produced and sold 70,000 units of product at a sale price of $15.00 per unit. There was no beginning inventory of product on January 1, 2014.

Required:

1. Prepare Contribution Margin Income Statement.
2. Compute BEP (in units and TL)
3. Compute Operating Leverage
4. Compute Safety Margin (in units)
5. Compute the amount that must be sold to increase operating income (net incom 70 %.
6. Marketing manager believes there will be 10 % increase in sales if Company decreases price by 10 %. Should price is decreased?
7. If Company decreases price by 10%, how many units must be sold to maintain current profit?

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Q2)Print House, Inc., produces and sells laser jet printers for $1,400 each. The variable costs of each printer total $1,000 while total annual fixed costs are $300,000. Company’s profit for 2008 is $200,000.

Required:  

            a) Compute the Company’s break-even point in units and dollars.

   b) What is the Company’s margin of safety in units, dollars, and percentage?

            c) Compute the Company’s Sales for 2008.

Answer 1

Q1)

contribution margin income statement

particulars		amount($)
sales revenue	70000 unitsx15	1050000
variable costs:-		420000
manufacturing	230000
marketing	90000
administrative	100000
contribution margin		630000
fixed costs:-		450000
manufacturing	300000
marketing	100000
administrative	50000
operating profit		180000

break even point in units=total fixed costs/contribution per uni=450000/630000/70000=450000/9=50000 units

break even point in dollar sales=total fixed costs/pv ratio=450000/630000/1050000=450000/60%=$750000

margin of safety in units=budgetted sales-break even sales=70000 units-50000=20000 units

if operating income needs increase by 70%,then new operating income=180000+70%=306000, and units sold is 70000,then assume that selling price is x,then

particulars		amount($)
sales revenue	70000 units*x	70000x
variable costs(40%)		28000x
contribution margin		42000x
fixed costs:-		450000
manufacturing	300000
marketing	100000
administrative	50000
operating profit		306000

from the table,42000x-450000=306000 and x=(306000+450000)/42000=$18 ,

hence unit should sell for $18.

if selling price is decreased by 10%,then new selling price=15-10%=%13.5,then

particulars		amount($)
sales revenue	(70000+10%)x13.5	1039500
variable costs(40%)		415800
contribution margin		623700
fixed costs:-		450000
operating profit		173700

from the table,we can see that if price decreased by 10% and sales increased by 10%,the the operating profit is reducing from 180000 to 173700,hence the offer is not acceptable.

if company want to decline price by 10% and retain same operating income,then unit to be sold assume to be x,then  

particulars		amount($)
sales revenue	13.5*x	13.5x
variable costs(40%)		5.4x
contribution margin		8.1x
fixed costs:-		450000
operating profit		180000

from the table,8.1x-450000=180000 and x=(180000+450000)/8.1=77778 units to be sold.

Q2)A.break even point in units=fixed costs/contribution per unit,ie 300000/(1400-1000)=750 units

break even point in dollar sales=fixed costs/pv ratio=300000/(1400-1000)/1400= $1050000

B.margin of safety in units=budgetted sales-break even sales in units=1400 units-750 units=650 units

margin of safety in dollar sales=budgetted sales in dollar-break even sales in dollar

ie 1750000-1050000=$700000

c.sales for 2008 is calculated as follows

profit=sale-variable costs-fixed costs,ie let total units sold is x,then

200000=1400*x-1000*x-300000,ie 400x=200000+300000=500000 and x=500000/400=1250 units

so budgetted sales in dollar=1250 unitsx1400=1750000

budgetted sales in dollar calculation

profit=sale-variable costs-fixed costs,ie let total units sold is x,then

200000=1400*x-1000*x-300000,ie 400x=200000+300000=500000 and x=500000/400=1250 units

so budgetted sales in dollar=1250 unitsx1400=1750000