Question

Chapter 3 Submission Problem

Craftsman Tools manufactures a line of garden tools that hardware stores sell. The company’s controller has just received the company’s forecast for 2012 related to the three products: Weeders, Clippers, and Blowers. The preliminary information is as follows:

	Weeders	Clippers	Blowers
Unit Sales	40,000	40,000	80,000
Unit Selling Price	$80	$110	$135
Variable manufacturing cost per unit	$53	$69	$77
Variable selling cost per unit	$ 3	$ 9	$6
Fixed manufacturing costs	$1,000,000	$800,000	$1,400,000
Fixed selling & admin costs	$350,000	$450,000	$800,000

1. How many blowers must be sold next year to breakeven?

2. How many Clippers must be sold to earn a target net income of $300,000 for the year, assuming a 25% tax rate?

3. What sales revenues must be generated from Weeders in order to generate an operating income of $500,000?

4. Suppose the company is able to decrease its variable selling costs for clippers by $6, and blowers by $4. How many units (in total) must the company now sell to breakeven?

Answer 1

Step 1 : Prepare Marginal Cost Statement

Particulars	Weeders	Clippers	Blowers
Unit Sales	40000	40000	80000
Unit Selling Price - A	$80	$110	$135
Variable manufacturing cost per unit	$53	$69	$77
Variable selling cost per unit	$3	$9	$6
Total Variable Cost - B	$56	$78	$83
Contribution Per Unit C= (A-B)	$24	$32	$52
P/v Ratio = C/A	0.30	0.29	0.39

Break Even Point (Units) = Total Fixed Costs/ Contribution per unit

Break Even Point (Value) = Total Fixed cost/ P/v Ratio

1. Blowers Break even point (Units) = (1400000+800000)/52 = 42308 Units

2. Desired profit = 300000/(1-25%) = 400000

Desired Sales (Units) = (Desired profit + Fixed cost)/ Contribution per unit = (400000+800000+450000)/32 = 51563 Units

3. Desired Profit = 500000   

Desired Sales (Value) = (Desired profit + Fixed Cost)/P/V Ratio = (500000+1000000+350000)/0.3 = 6166667$

4. Break Even point = Total Fixed cost / Contribution per Unit

Contribution = Total selling price per unit - Total Variable cost = 80+110+135 - (56+72+79) = 118

Total Fixed costs = 1000000+350000+800000+450000+1400000+800000 = 4800000

Break even Point (Units) = 4800000/118 = 40678Units

(Hoope you will understand this, please give your valuable feedback)