Question

c. Net income before income tax of $150,000 is desired after covering $410,000 of fixed cost. What

minimum contribution margin ratio must be maintained if total sales revenue is to be $1,600,000?

d. Net income before income tax is 20% of sales revenue, the contribution margin ratio is 60%, and

the break-even dollar sales is $200,000. What is the amount of total revenue?

e. Total fixed cost is $350,000, variable cost per unit is $26, and unit sales price is $50. What dollar

sales volume will generate an after-tax net income of $60,000 when the income tax rate is 40%?

P6-10B. Break-Even and Net Income Planning Venice Company has recently leased facilities for the manu-

facture of a new product. Based on studies made by its accounting personnel, the following data are

available:

Estimated annual sales ........................................ 60,000 units

Estimated Costs Amount Unit Cost

Direct materials............................................... $ 870,000 $14.50

Direct labor .................................................. 750,000 12.50

Manufacturing overhead........................................ 384,000 6.40

Administrative expenses........................................ 228,000

3.80

$2,232,000 $37.20

Selling expenses are expected to be 20% of sales, and the selling price is $82 per unit. Ignore income

tax in this problem.

Required

a. Compute a break-even point in dollars and in units. Assume that manufacturing overhead and

administrative expenses are fixed but that other costs are variable.

b. What would net income before income tax be if 40,000 units were sold?

c. How many units must be sold to earn a net income before income tax of 10% of sales?

P6-11B. Multiple Product Break-Even and Net Income Planning Madison Company manufactures and

sells the following three products:

Red Blue Green

Unit sales ............................................ 20,000 30,000 50,000

Unit sales price........................................ $30 $62 $18

Unit variable cost ...................................... $18 $38 $14

Required

Assume that total fixed cost is $324,800.

a. Compute the net income before income tax based on the sales volumes shown above.

b. Compute the break-even point in total dollars of revenue and in specific unit sales volume for

each product.

c. Prove your break-even calculations by computing the total contribution margin related to your

answer in requirement (b).

EXTENDING YOUR KNOWLEDGE

EYK6-1. Business Decision Case The following total cost data are for Ralston Manufacturing Company,

which has a normal capacity per period of 400,000 units of product that sell for $18 each. For the

foreseeable future, regular sales volume should continue at normal capacity of production.

Solution 6.1

y-intercept 5 Total fixed costs of $5.000

Slope 5 Variable cost per unit of approximately $0.50 per water bottle cage

Total cost 5 ($0.50 3 # of water bottle cages) 1 $5,000

$25,000 5 $0.50 3 40,000 1 $5,000

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . $1,720,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,120,000

Variable overhead . . . . . . . . . . . . . . . . . . . . . . 560,000

Fixed overhead (Note 1). . . . . . . . . . . . . . . . . . 880,000

Selling expense (Note 2) . . . . . . . . . . . . . . . . . 720,000

Administrative expense (fixed) 200,000

$5,200,000

Notes:

1. Beyond normal capacity, fixed overhead cost increases $30,000 for each 20,000 units or fraction

thereof until a maximum capacity of 640,000 units is reached.

2. Selling expenses are a 10% sales commission. Ralston pays only one-half of the regular sales

commission rates on any sale of 20,000 or more units.

Ralston’s sales manager has received a special order for 48,000 units from a large discount chain at a

special price of $16 each, F.O.B. factory. The controller’s office has furnished the following additional

cost data related to the special order:

1. Changes in the product’s construction will reduce direct materials $1.80 per unit.

2. Special processing will add 25% to the per-unit direct labor costs.

3. Variable overhead will continue at the same proportion of direct labor costs.

4. Other costs should not be affected.

Required

a. Present an analysis supporting a decision to accept or reject the special order. Assume Ralston’s

regular sales are not affected by this special order.

b. What is the lowest unit sales price Ralston could receive and still make a before-tax profit of

$39,600 on the special order?

Answer 1

c. Answer: 35 %

Total contribution margin = $ 410,000 + $ 150,000 = $ 560,000

Contribution margin ratio = $ 560,000 / $ 1,600,000 * 100 = 35 %

d. Answer: $ 300,000

Break-even dollar sales = Total Fixed Cost / Contribution Margin Ratio = Total Fixed Cost / 0.60 = $ 200,000

Total fixed cost = $ 200,000 x 0.60 = $ 120,000.

Let total revenue be S.

S x 0.60 - 120,000 = 0.20 S

or 0.40S = 120,000

S = 120,000 / 0.40 = $ 300,000

e. Answer: $ 937,500

Before tax income = $ 60,000 / ( 1 - 0.40 ) = $ 100,000.

Contribution margin ratio = ( 50 - 26 ) / 50 = 0.48

Dollar sales volume required to earn before-tax $ 100,000 = $ ( 350, 000 + 100,000 ) / 0.48 = $ 937,500

P6-10B :

a. Total variable cost per unit = Direct Materials + Direct Labor + Selling Expenses = $ ( 14.50 + 12.50 + 82 x 0.2 ) = $ 43.40

Contriution margin per unit = $ 82 - $ 43.40 = $ 38.60

Total fixed costs = $ 384,000 + $ 228,000 = $ 612,000.

Break-even point in units = $ 612,000 / $ 38.60 = 15,854.92 units

Break-even sales dollars = $ 1,300,103.62

b. If 40,000 units were sold, net income before tax would be $ 932,000.

Sales	3,280,000
Variable Costs	1,736,000
Contribution Margin	1,544,000
Total Fixed Costs	612,000
Net Income Before Taxes	932,000

c. Answer: 20,131.58 units.

Let the unit sales be Q.

Sales revenue = 82 Q.

38.60 Q - 612,000 = 82 Q x 0.10

or 30.4 Q = 612,000

or Q = 20,131.58 units