Question

Problem 18-5A (Part Level Submission)

Viejol Corporation has collected the following information after its first year of sales. Sales were $1,600,000 on 100,000 units, selling expenses $250,000 (40% variable and 60% fixed), direct materials $510,000, direct labor $288,200, administrative expenses $284,000 (20% variable and 80% fixed), and manufacturing overhead $350,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.

Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)

(1)		Contribution margin for current year
(2)		Contribution margin for projected year
(3)		Fixed Costs

Answer 1

Statement showing bifurcation of variable cost and fixed cost

Particular	Total	Ratio	Variable cost per unit	Variable cost	Ratio	Fixed cost
Selling expense	250000	40%	1	100000	60%	150000
Direct material	510000	100%	5.1	510000
Direct labour	288200	100%	2.882	288200
Administrative expense	284000	20%	0.568	56800	80%	227200
Manufacturing Expense	350000	70%	2.45	245000	30%	105000
Total	1682200		12	1200000		482200

Income statement

Particular	Rate per unit	Current year	Projected year (Unit sold =110000)
Sales	16	1600000	1760000
Variable cost	12	1200000	1320000
Contribution	4	400000	440000
Fixed cost		482200	482200
Loss		-82200	-42200

Requirement 1. Contribution Margin for the current year =$ 400000

Requirement 2. Contribution margin for the projected sales=440000

Requirement 3. Fixed Cost = 482200

Work notes

** Sales for the Current year is 100000 units. It has projected that unit sale will increase by 10% in the next year.

So unit sale for the next year = 100000 + (100000×10%) = 110000 units

Contribution margin ratio = Contribution per unit/Sale price = 4/16 =25%