Question

Monterey Co. makes and sells a single product. The current selling price is $18 per unit. Variable expenses are $10.8 per unit, and fixed expenses total $39,080 per month. (Unless otherwise stated, consider each requirement separately.)

Calculate the break-even point expressed in terms of total sales dollars and sales volume. (Do not round intermediate calculations.)

	Break-even sales Break-even volume units

b. Calculate the margin of safety and the margin of safety ratio. Assume current sales are $115,700. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.)

c. Calculate the monthly operating income (or loss) at a sales volume of 5,150 units per month. (Do not round intermediate calculations.)

d. Calculate monthly operating income (or loss) if a $2 per unit reduction in selling price results in a volume increase to 8,350 units per month. (Do not round intermediate calculations.)

f. Calculate the monthly operating income (or loss) that would result from a $1 per unit price increase and a $6,000 per month increase in advertising expenses, both relative to the original data. Assume a sales volume of 5,150 units per month. (Do not round intermediate calculations.)

Management is considering a change in the sales force compensation plan. Currently each of the firm's two salespeople is paid a salary of $2,500 per month.

g-1. Calculate the monthly operating income (or loss) that would result from changing the compensation plan to a salary of $400 per month, plus a commission of $0.9 per unit, assuming a sales volume of 5,150 units per month. (Do not round intermediate calculations.)

g-2. Calculate the monthly operating income (or loss) that would result from changing the compensation plan to a salary of $400 per month, plus a commission of $0.9 per unit, assuming a sales volume of 6,250 units per month. (Do not round intermediate calculations. Losses should be indicated by a minus sign.)

h-1. Assuming that the sales volume of 6,250 units per month achieved in part g could also be achieved by increasing advertising by $1,000 per month instead of changing the sales force compensation plan. What would be the operating income or loss?(Do not round intermediate calculations. Losses should be indicated by a minus sign.)

Answer 1

A.Break even point = Total Fixed Costs/Contribution margin per unit

= 39,080/7.2 = 5,427.77 units

Note: Contribution Margin per Unit = Selling Price – Variable Cost

In Sales Dollars = Fixed Costs/Contribution Margin Ratio

= 39,080/40% = 97,700

b.Current Sales = $115,700

Margin of Safety = Sales – Break Even Sales

= $18,000

Ratio = 18,000/115,700

= 15.55%

c. Sales Volume = 5,150 units

Contribution Margin = 5,150*7.2 = $37,080

Less : Fixed Costs = $39,080

Operating Loss = $(2,000)

d.Revised Sales = 8,350+5150 = 13,500 units

Comtribution Margin = 13,500*(7.2 – 2) = $70,200

Less: Fixed Costs = $39,080

Operating Profit = $31,120

f.Contribution Margin = 5,150*8.2 = $42,230

Less: Fixed costs 39,080+6,000 = $45,080

Operating Profit/(Loss) = $(2,850)

g-1 Revised compensation = 400*2 + 0.9*5,150 = $5,435

Current = $5,000

Loss = $(435)

g-2 Volume = 6,250 units

Revised compensation = 800+ 0.9*6250 = $6,425

Loss = $(1,425)