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 639,000 units at an average selling price of $4.60 per unit. The variable costs were $2,057,580, and the fixed costs were $573,183. 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 57,000 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 484,000 sprinkler units at an average selling price of $28.20. The manufacturing costs are $7,589,350 variable and $1,925,074 fixed. Selling and administrative costs are $2,647,250 variable and $805,500 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 484,000 sprinkler units at an average selling price of $28.20. The manufacturing costs are $7,589,350 variable and $1,925,074 fixed. Selling and administrative costs are $2,647,250 variable and $805,500 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 DecreaseIncrease by % Profit DecreaseIncrease by $

Answer 1

Contribution margin ratio=Contribution margin per unit/Average selling price
Contribution margin per unit=Average selling price-Variable cost per unit
Variable cost per unit=Total variable cost/Units sold=2057580/639000=$ 3.22
Contribution margin per unit=4.60-3.22=$ 1.38
Contribution margin ratio=1.38/4.60=0.3
Break-even point in units=Fixed cost/Contribution margin per unit=573183/1.38=415350
Break-even point in dollars=Fixed cost/Contribution margin ratio=573183/0.30=$ 1910610
Margin of safety in dollars=Actual sales in dollars=Breakeven point in dollars=(639000*4.60)-1910610=2939400-1910610=$ 1028790
Margin of safety ratio=Margin of safety in units/Actual sales in units
Margin of safety in units=Actual sales in units-Breakeven sales in units=639000-415350=223650
Margin of safety ratio=223650/639000=0.35=35%
Current income:
				$
Sales revenue		(639000*4.60)		2939400
Less: Variable costs				2057580
Contribution margin				881820
Less: Fixed costs				573183
Net income				308637
Increase in income by 10%
Desired income=308637*110%=$ 339501
Units required to achieve this income=(Fixed cost+Desired income)/Contribution margin per unit=(573183+339501)/1.38=661365.2=661366
Additional units required to sell=661366-639000=22366 units
If sales increase by 57000 units
Units sold=639000+57000=696000 units
Income:
				$
Sales revenue		(696000*4.60)		3201600
Less: Variable costs		(696000*3.22)		2241120
Contribution margin				960480
Less: Fixed costs				573183
Net income				387297
Increase in income=387297-308637=$ 78660
Special-order sprinklers:
New:
Number of sprinlers sold=Increase by 10%=484000*110%=532400
Average selling price=28.20+0.20=$ 28.40
Current variable cost per unit=(Variable manufacturing cost+Variablle selling and administrative cost)/Current sales level of sprinklers
Current variable cost per unit=(7589350+2647250)/484000=$ 21.15
New variable cost per unit=21.15+0.70=$ 21.85
Income statement:
		Current	New
Sales revenue		13648800	15120160
		(484000*28.20)	(532400*28.40)
Less: Variable costs		10236600	11632940
		(484000*21.15)	(532400*21.85)
Contribution margin		3412200	3487220
Less: Fixed costs
(1925074+805500)		2730574	2730574
Net income		681626	756646
Increase in net income=756646-681626=$ 75020
Contribution margin ratio=Contribution margin/Sales revenue
				Current	New
Contribution margin			a	3412200	3487220
Sales revenue			b	13648800	15120160
Contribution margin ratio			a/b	25.00%	23.06%
Decrease in contribution margin=25-23.06=1.94%