Question

Gift4U produces one single product, a small reading tablet, and sells it at $120 per unit. Its current annual sales are $240,000. Its annual fixed costs include factory rent, $43,400; depreciation expense, equipment, $12,000; utilities, $22,000; insurance, $8,400. Its variable costs include materials, $36 per unit, and direct labour, $48 per unit. Gift4U's income tax rate is 20%.

REQUIRED

A.   What is the contribution margin per unit?

B.   What is the contribution margin ratio?

C.   How many units must Gift4U sell to break even?

D.   If Gift4U would like to earn a profit after tax of $12,000, what should the sales be? At this sales level, what is the degree of operating leverage? What is the margin of safety in units?

E.   If Gift4U would like to earn a profit after tax that is 8% of sales, what should the sales be? How many units does Gift4U need to increase from the current sales level?

please complete all parts and show work.

Answer 1

Answer:

Requirement A

Sales price per unit		$120
Variable cost per unit:
Direct Material	$36
Direct labor	$48	$84
Contribution margin per unit (selling price – Variable cost per unit)		$36

Requirement B:

Contribution margin ratio = Contribution per unit/selling price*100

A	Contribution margin per unit	$36
B	Sales price per unit	$120
C = A/B	Contribution margin ratio	30%

Requirement C:

Break even Point (units) = Total fixed cost/Contribution margin per unit

	Fixed Expenses:
	Factory Rent	$43,400
	Depreciation expense	$12,000
	Utilities	$22,000
	Insurance expense	$8,400
A	Total Fixed expense	$85,800
B	Contribution margin per unit	$36
C = A/B	No. of units required to be sold to Break Even	2,383

Requirement D:

Sales $ to Earn Desired profit = (Fixed cost + Desired profit)/Contribution margin Ratio

Hear Desired profit = $12,000 (After tax)

A	After Tax profits	$12,000
B = A/80% Tax rate 20%	Hence, before tax profits =	$15,000
C	Total Fixed expense	$85,800
D = B+C	Total Contribution margin required	$100,800
E	Contribution margin ratio	30%
F = D/E	Sales should be	$336,000
G = F x 30%	Contribution margin would be	$100,800
H = G - C	Net Operating Income	$15,000
I = G/H	Degree of Operating Leverage (Contribution/Net operating income)	6.72
J = F/$120	Sales in Units Sales in $/Selling price per unit	2,800
K	Break Even units, calculated above	2,383
L = J - K	Margin of Safety in units	417

.

Requirement E:

Assume sales Amount $ x

Profit after tax required = 8% of Sales = 0.08x

Profit before tax = 0.08x/80% = 0.1x

Contribution margin = 30% of x = 0.3x

Fixed cost = $85,800

Contribution margin - Fixed Cost = Before tax profits

0.3x – 85,800 = 0.1x

0.3x - 0.1x = 85,800

0.2x = 85,800

x = 85,800/0.2

x = 429,000

• Sales should be $ 429,000;

• Sales in units = $429,000/120=3,575 units

• Currently it sells 2000 units. ($240,000/120)

• So Units need to be increased by 1,575 units