Question

The Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company’s profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them.

Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 720,000 units at an average selling price of $4.70 per unit. The variable costs were $2,030,400, and the fixed costs were $879,840.

What is the product’s contribution margin ratio? (Round ratio to 0 decimal places, e.g. 25%.)

Contribution margin ratio

%

  

What is the company’s break-even point in units and in dollars for this product?

Break-even point in units			units
Break-even point in dollars		$

  

What is the margin of safety, both in dollars and as a ratio? (Round ratio to 0 decimal places, e.g. 25%.)

Margin of safety in dollars		$
Margin of safety ratio			%

  

If management wanted to increase its income from this product by 10%, how many additional units would have to be sold to reach this income level?

Waterways would have to sell an additional

units

If sales increase by 55,000 units and the cost behaviors do not change, how much will income increase on this product?

Income will increase by

$

Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 496,000 sprinkler units at an average selling price of $27.80. The manufacturing costs are $7,654,360 variable and $1,991,155 fixed. Selling and administrative costs are $2,687,240 variable and $796,450 fixed.

If Waterways begins mass-producing its special-order sprinklers, how would this affect the company? (Round ratio to 0 decimal places, e.g. 5% and Net income to 0 decimal places, e.g. 2,520.)

Current

New

Effect

Contribution margin ratio

%

%

DecreaseIncrease

by

%

Net income

$

$

DecreaseIncrease

by

$

Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 496,000 sprinkler units at an average selling price of $27.80. The manufacturing costs are $7,654,360 variable and $1,991,155 fixed. Selling and administrative costs are $2,687,240 variable and $796,450 fixed.

If the average sales price per sprinkler unit did not increase when the company began mass-producing the special-order sprinkler, what would be the effect on the company? (Round answers to 0 decimal places, e.g. 5% or 2,520.)

Contribution margin ratio		IncreaseDecrease		by			%
Profit		IncreaseDecrease		by		$

Answer 1

INCOME STATEMENT FOR THE CURRENT YEAR

Particular	Qty	Rate	Amount
Sales	720000	4.70	3384000
Less:Variable cost	720000	2.82	2030490
Contribution	720000	1.88	1353510
Less: Fixed cost			879840
Profit	720000	0.66	473670

Contribution margin ratio= Contribution/Sales

= 1353510/3384000 =40%

Break even point sales in follows = Fixed cost/PV ratio

= 879840/0.40 = $ 2199746.26

Break even point sales in units = 2199746.26/4 70 = 468031 units

Margin of safety Sales = Total sales - Break even sales

= 3384000 - 2199746.26 = $1184253.74

Margin of safety ratio = 1184253.75/2199746.26 =53.84%

Income statement( increase in profit by 10%)

Particular	qty	Rate	Amount
Profit(463670 + (0.10×463670))	739296.28	0.69	510037
Add: Fixed Cost			879840
Contribution	739296.28	1.88	1389877
Sales	739296.28	4.70	3474692.5

Income statement(units sold increased by 55000 units)

Particular	qty	Rate	Amount
Sales	775000	4.70	3642500
Variable Cost	775000	2.82	2185500
Contribution	775000	1.82	1410500
Fixed Cost			879840
Profit	775000		530660

In one statement for special order sprinkler

Particular	Current year	Coming year
Sales	13788800	15276800
Variable cost	10341600	11757680
Contribution	3447200	3519120
Fixed Cost	2787605	2787605
Contribution	659595	731515
PV ratio	25%	23.05%