Question

6. CVP Analysis (9pts): The Ood Sphere, Ltd. produces and sells a single product, gaming headsets, with the following information:

	Per unit:	Per month:
Selling price	$79.00
Variable manufacturing costs:
Direct Materials	$18.00
Direct Labor	$7.75
Variable Factory OH	$6.00
Fixed manufacturing costs (Fixed OH)		$28,350
Variable selling and administrative costs	$10.50
Fixed selling and administrative costs		$17,180

The company sells 1,500 units during the month ended February 28^th.

1. (3pts) Prepare a contribution margin income statement for February at the current sales volume of 1,500 units.

2. (1pt) How many headsets need to be sold per month in order to break even (round your answer up to the nearest whole unit).

3. (1pt). How many headsets need to be sold per month in order to earn a target profit of $20,000 (round your answer up to the nearest whole unit).

4. (4pts total) The production manager at The Ood Sphere is considering purchasing a new machine to use at its main factory where production occurs. As a result, the manager predicts the following impact on production, price, and costs if they purchase this machine for the upcoming month ended March 31st:

• Fixed Factory OH costs will increase by $4,000 per month.
• Direct labor costs will decrease by $1.50 per unit.
• The selling price will be decreased by $0.25 per unit.
• Sales volume will increase from its current level of 1,500 units to 1,650 units.

1. (3pts) Prepare a contribution margin income statement for March assuming all of these changes are implemented.

2. (1pt) How many headsets need to be sold in March in order to break even assuming all of these changes are implemented (round your answer up to the nearest whole unit)?

Answer 1

1. Contribution format income statement for February:

Sales = Selling price per unit × Units sold = 1,500 × $79.00 = $118,500.00

Variable manufacturing costs:

Direct Materials = 1,500 × $18.00 = $27,000.00

Direct Labor = 1,500 × $7.75 = $11,625.00

Variable Factory OH = 1,500 × $6.00 = $9,000.00

Variable selling and administrative costs = 1,500 × $10.50 = $15,750.00

2. Headsets to be sold per month in order to break even:

Break-even point in units = Fixed costs ÷ Contribution margin per unit =

Fixed costs = $28,350 + $17,180 = $45,530
Contribution margin per unit = Selling price per unit - Total variable costs per unit = $79 - ($18.00 + $7.75 + $6.00 + $10.50) = $36.75

Break-even point in units = $45,530 ÷ $36.75 = 1,239 units

Headsets to be sold per month in order to break even = 1,239 units

3. Headsets to be sold per month in order to earn a target profit of $20,000:

Units to be sold to earn target profit of $20,000 = (Fixed costs + Target profit) ÷ Contribution margin per unit = ($45,530 + $20,000) ÷ $36.75 = 1,783 units

Headsets to be sold per month in order to earn a target profit of $20,000 = 1,783 units

4. Purchase of new machine:

Sales volume will increase from its current level of 1,500 units to 1,650 units.
New Sales volume = 1,650 units

The selling price will be decreased by $0.25 per unit.
New selling price = $79.00 - $0.25 = $78.75

Direct labor costs will decrease by $1.50 per unit.
New Direct Labor = $7.75 - $1.50 = $6.25

Fixed Factory OH costs will increase by $4,000 per month.
New Fixed Factory OH costs = $28,350 + $4,000 = $32,350

• Contribution format income statement for March:

Sales = Selling price per unit × Units sold = 1,650 × $78.75 = $129,937.50

Variable manufacturing costs:

Direct Materials = 1,650 × $18.00 = $29,700.00

Direct Labor = 1,650 × $6.25 = $10,312.50

Variable Factory OH = 1,650 × $6.00 = $9,900.00

Variable selling and administrative costs = 1,650 × $10.50 = $17,325.00

• Headsets to be sold in March in order to break even, if all of these changes are implemented:

Break-even point in units = Fixed costs ÷ Contribution margin per unit =

Fixed costs = $32,350 + $17,180 = $49,530
Contribution margin per unit = Selling price per unit - Total variable costs per unit = $78.75 - ($18.00 + $6.25 + $6.00 + $10.50) = $38.00

Break-even point in units = $49,530 ÷ $38.00 = 1,303 units

Headsets to be sold per month in order to break even = 1,303 units