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 727,000 units at an average selling price of $4.90 per unit. The variable costs were $2,137,380, and the fixed costs were $997,444.

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 54,000 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 $0.80 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 485,000 sprinkler units at an average selling price of $27.20. The manufacturing costs are $7,211,860 variable and $1,837,756 fixed. Selling and administrative costs are $2,682,140 variable and $790,290 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 % % IncreaseDecrease by % Net income $ $ IncreaseDecrease 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 $0.80 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 485,000 sprinkler units at an average selling price of $27.20. The manufacturing costs are $7,211,860 variable and $1,837,756 fixed. Selling and administrative costs are $2,682,140 variable and $790,290 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 IncreaseDecrease by $

Answer 1

Variable cost per unit = Total variable cost/Number of units

= 2,137,380/727,000

= $2.94

Contribution Margin Ratio = (Selling price – Variable costs)/Selling price

= (4.90-2.94)/4.90

= 40%

Break even point in units = Fixed costs/Contribution Margin per Unit

= 997,444/1.96

= 508,900 units

In Dollars = Fixed costs/CM Ratio

= 997,444/40%

= $2,493,610

Margin of Safety in Dollars = Sales – Break even Sales

= 727000*4.90 – 2,493,610

= $1,068,690

Ratio = 1,068,690/3,562,300 = 30%

Current Income = 727000*1.96 – 997,444 = $427,476

Additional units required to be sold = Additional Income required/CM per unit

= 42,747.6/1.96

= 21,810 units

Income will increase by the amount of Contribution Margin as fixed costs do not change with change in sales

= 54000*1.96

= $105,840

	Current	New
Selling price	27.2	27.4
Variable costs	20.4	21.2
Contribution Margin	6.8	6.2
CM Ratio	25.00%	22.63%	Decrease by 2.37%
Units sold	485,000	533,500
Fixed costs	2,628,046	2,628,046
Net Income	669,954	679,654	9,700	Increase
	Current	New
Selling price	27.2	27.2
Variable costs	20.4	21.2
Contribution Margin	6.8	6
CM Ratio	25.00%	22.06%	Decrease by 2.94%
Units sold	485,000	533,500
Fixed costs	2,628,046	2,628,046
Net Income	669,954	572,954	-97,000	Decrease