Question

QUESTION 1

Valencia Manufacturing Company manufactures and sells musical gadgets. The business earned Operating Income of $220,000 in 2018, when selling price per unit was $200, and the president of Valencia is under pressure to increase operating income in 2019. Data for variable cost per unit and total fixed costs were as follows:

Variable expenses per unit:                Direct Material	$40
Direct Labour	$32
Variable Manufacturing Overhead	$18
Fixed expenses:                      Fixed Manufacturing Overhead	$190,000
Fixed Selling Costs	$115,000
Fixed Administrative Costs	$135,000

Required:

(a)Using the equation method, calculate the number of units sold in 2018.

(b) Given the sales units calculated in Part (a), prepare a contribution margin income statement for the year ended December 31, 2018, detailing the composition of total fixed costs and clearly showing contribution and net income.                                                                          

(c) Calculate Valencia’s break-even point in units and in sales dollars.             

(d) Calculate the margin of safety in units and in sales dollars.                          

Answer 1

A) px = vx + FC + Profit

Where, p = Price per unit

x = Number of units sold

v = Variable cost per unit

FC = Total fixed cost

200x = [ $ 40 + $ 32 + $ 18]x + [ $ 190,000 + $ 115,000 + $ 135,000] + $ 220,000

200x = 90x + $ 440,000 + $ 220,000

200x - 90x = $ 660,000

110x = $ 660,000

x = $ 660,000/ 110 = 6,000 units

B)

Contribution margin income statement

For the year ended December 31st, 2018

	$	$
Sales revenue [ 6,000 X $ 200]		1,200,000
Less: Variable cost
Direct materials [ 6,000 X $ 40]	240,000
Direct labor [ 6,000 X $ 32]	192,000
Variable manufacturing overhead [ 6,000 X $ 18]	108,000
		540,000
Contribution margin		660,000
Less: Fixed expenses
Manufacturing overhead	190,000
Selling costs	115,000
Administrative costs	135,000
		440,000
Operating income		220,000

C)

Break even point ( Units) = Total fixed cost / Contribution per unit

Contribution per unit = Contribution margin / Number of units sold

Contribution per unit = $ 660,000/ 6,000 = $ 110

Break even ( units) = $ 440,000 / $ 110 =4,000 units

Break even ( sales dollars) = Total Fixed cost / PV ratio

PV ratio = [ Contribution/ sales ] X 100 %

PV ratio = [ $ 660,000/ $ 1,200,000] X 100 %

PV ratio = 55 %

Break even ( sales dollars) = Fixed cost / PV ratio

Break even ( sales dollars) = $ 440,000 / 55%

Break even ( sales dollars ) = $ 440,000 X 100/55 = $ 800,000

D)

Margin of safety ( units ) = Actual sold units - BEP units = 6,000 - 4,000 = 2,000 units

Margin of safety ( sales dollars ) = Actual sales in dollars - BEP sales in dollars = $ 1,200,000 - $ 800,000 = $ 400,000