Question

Problem 3-19B Effect of converting variable to fixed costs

Stackhouse Company manufactures and sells its own brand of digital cameras. It sells each camera for $250. The company’s accountant prepared the following data:

Manufacturing costs
Variable	$90 per unit
Fixed	$300,000 per year
Selling and administrative expenses
Variable	$10 per unit
Fixed	$60,000 per year

Required

Use the per-unit contribution margin approach to determine the break-even point in units and dollars.

Use the per-unit contribution margin approach to determine the level of sales in units and dollars required to obtain a $120,000 profit.

Suppose that variable selling and administrative costs could be eliminated by employing a salaried sales force. If the company could sell 4,200 units, how much could it pay in salaries for the salespeople and still have a profit of $120,000? (Hint: Use the equation method.)

Answer 1

Ans.(a)	Determination of The Break Even point in units and in Dollars using contribution margin.
	Particulars			Amt.($)
	Sale Price			250
	Less: Variable Costs
	Variable Expenses			90
	Selling and Administrative Expenses			10
	Contibution Margin			150
	Contribution Margin % =		Contribution Margin/Sale price
	=		$150/$250
	=		60%
i)	Break Even Point (in Units) =		Fixed Expenses/Contibution Margin p.u.
	=		($300,000 + $60,000)/$150
	=		2400
ii)	Break Even Point (in Dollars) =		Fixed Expenses/Contibution Margin %
	=		($300,000 + $60,000)/60%
	=		$   600,000
Ans.(b)	Determination level of sales in units and in Dollars to obtain a $120,000 profit using contribution margin approach.
	Profit =	Contribution - Fixed Expenses
	$120,000 =	Contribution - ($300,000 + $60,000)
	$120,000+$360,000 =	Contribution
	Contribution =	$480,000
i)	Sales (in units) =	Total Contribution/Contribution p.u.
	=	$480,000 / $150
	=	3200
ii)	Sales (in Dollars) =	Sales (in units) x Sale Price
	=	3200 x $250
	=	$ 800,000
Ans.(c)	Variable selling and administrative costs will be eliminated by emplyoing a salaried sales force than,
	Profit =	{(Sales x Sales price) - Variable cost} - Fixed Expenses
	$120,000 =	{(4,200 x $250) - (4200 x $100)} - Fixed Expenses
	$120,000 =	(1,050,000 - 420,000) - Fixed Expenses
	Fixed Expenses =	$630,000 - $120,000
	=	$ 510,000