Question

Problem 19-2A Lorge Corporation has collected the following information after its first year of sales. Sales were $ 1,603,200 on 100,200 units; selling expenses $ 240,480 (40% variable and 60% fixed); direct materials $ 512,022 ; direct labor $ 285,570 ; administrative expenses $ 280,560 (20% variable and 80% fixed); manufacturing overhead $ 360,720 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year. Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.) (1) Contribution margin for current year $ Entry field with correct answer Contribution margin for projected year $ Entry field with incorrect answer (2) Fixed costs for current year $ Entry field with correct answer LINK TO TEXT Correct answer. Your answer is correct. Compute the break-even point in units and sales dollars for the first year. (Round contribution margin ratio to 2 decimal places e.g. 0.15 and final answers to 0 decimal places, e.g. 2,510.) Break-even point Entry field with correct answer units Break-even point $ Entry field with correct answer SHOW SOLUTION SHOW ANSWER LINK TO TEXT Correct answer. Your answer is correct. The company has a target net income of $160,000. What is the required sales in dollars for the company to meet its target? Sales dollars required for target net income $ Entry field with correct answer SHOW SOLUTION SHOW ANSWER LINK TO TEXT Incorrect answer. Your answer is incorrect. Try again. If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 10.5.) Margin of safety ratio Entry field with incorrect answer % LINK TO TEXT Incorrect answer. Your answer is incorrect. Try again. The company is considering a purchase of equipment that would reduce its direct labor costs by $100,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $399,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $250,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution margin ratio to 2 decimal places, e.g. 25.25 and all other answers to 0 decimal places, e.g. 2,520. Use the current year numbers for calculations.) 1. Contribution margin $ Entry field with incorrect answer 2. Contribution margin ratio Entry field with incorrect answer % 3. Break-even point $

Answer 1

1)		Current Year
			Total	Per Unit
	Sales in units	100200
	Sales revenue		1603200	16.00
	Variable expenses:
	Direct materials	512022
	Direct labor	285570
	Manufacturing overhead (360720*70%)	252504
	Administrative expenses (280560*20%)	56112
	Selling expenses (240480*40%)	96192
	Total variable expenses		1202400	12.00
	Contribution Margin		400800	4.00
	Fixed expenses:
	Manufacturing overhead (360720*30%)	108216
	Administrative expenses (280560*80%)	224448
	Selling expenses (240480*60%)	144288
	Total fixed expenses		476952
	Net operating income		-76152
		Projected year
			Total	Per Unit
	Sales in units	110220
	Sales revenue		1763520	16.00
	Variable expenses:
	Direct materials	563224
	Direct labor	314127
	Manufacturing overhead (360720*70%*110%)	277754
	Administrative expenses (280560*20%*110%)	61723
	Selling expenses (240480*40%*110%)	105811
	Total variable expenses		1322640	12.00
	Contribution Margin		440880	4.00
	Fixed expenses:
	Manufacturing overhead	108216
	Administrative expenses	224448
	Selling expenses	144288
	Total fixed expenses		476952
	Net operating income		-36072
1)	CONTRIBUTION MARGIN:
	Current year	400800
	Projected year	440880
2)	Fixed expenses--Current year & projected year	476952
3)	Break even point for 1st year:
	In units = fixed cost/CM per unit = 476952/4 =	119238	Units
	In sales dollars = Fixed cost/CM ratio = 476952/(4/16) =	$     19,07,808
4)	Sales in dollars to make NI of $160000 = (160000+Fixed cost)/CM ratio) = (160000+476952)/25% =	$     25,47,808
5)	Margin of safety ratio = (Sales for target income-Break even sales)/Sales for target income = (2547808-1907808)/2547808=	25.12%
6)	The changes are projected in 1st year's figures, as below
	for the purpose of calculations:
		Current Year
			Total	Per Unit
	Sales in units	100200
	Sales revenue		1603200	16.00
	Variable expenses:
	Direct materials	512022
	Direct labor (285570-100000)	185570
	Manufacturing overhead (399000*30%)	119700
	Administrative expenses (280560*20%)	56112
	Selling expenses (250000*90%)	225000
	Total variable expenses		1098404	10.96
	Contribution Margin		504796	5.04
	Fixed expenses:
	Manufacturing overhead (399000*70*30%)	279300
	Administrative expenses (280560*80%)	224448
	Selling expenses (250000*10%)	25000
	Total fixed expenses		528748
	Net operating income		-23952
	CONTRIBUTION MARGIN	504796
	CONTRIBUTION MARGIN RATIO = 5.04/16 =	31.50%
	BREAK EVEN POINT IN SALES DOLLARS = 528748/31.5%=	$     16,78,565