Question

2. Cost-Volume-Profit (CVP) Relationships

Bilco Fabrication manufactures one product, a low-cost car battery. Cost analysis by the accounting department has determined that the variable cost per unit is $12. Bilco’s fixed costs amount to $792,480 annually. The company is projecting data based on a sales price of $20. Use the above data to answer the following:

* Calculate Bilco’s break-even point in number of units.

* Figure the level of sales that Bilco would have to achieve to reach a target income of $150,000. Indicate your answer in dollars of sales.

* What is Bilco’s Degree of operating leverage at 125,000 batteries? If sales were to increase by 8%, how much would Net Income increase by (b-% c-$)?

a. _______________               b. _________________        c. _________________

* Indicate the company’s margin of safety at a projected level of sales of 125,000 units sold, stated in (a) dollars of sales, and (b) as a percentage of sales and (c) units.

         a. _______________               b. _________________       c. _________________

Answer 1

A)BREAK-EVEN POINT IN UNITS = FIXED COST / (SALES PRICE PER UNIT - VARIABLE COST PER UNIT)

= $792,480/($20 - $12)

= 99,060 UNITS

B) CM RATIO = (SALE - VARIABLE)/SALE

= ($20 - $12)/$20

= 40%

REQUIRED SALE = PROFIT + FIXED COST / CM RATIO

= $150,000 + $792,480/40%

= $2,256,200

C)DEGREE OF OPEARTING LEVARGE = CONTRIBUTION MARGIN/OPEARATING PROFIT

= 125,000 UNITS * $8/(125,000 * 8) - $792,480

= 1,000,000/207,520

= 4.81

IF SALES INCREASE BY 8% = 135,000 UNITS*8

TOTAL CONTRIBUTION = 1,080,000

NET OPEARTING INCOME = 1,080,000 - 792,480 = 287,520

NET INCOME WILL BE INCREASE BY = 287,520 - 207,520 = 80,000

MARGIN OF SAFETY

DOLLAR OF SALES = TOTAL SALES - BREAEVN IN SALES

= (125,000 * $20) - (99,060 * 20)

= 2,500,000 - 1,981,200

= $518,800

PERCENTAGE OF SALES = MARGIN OF SAFETY / SALES

= $518,800/2,500,000

= 20.75%

IN UNITS = TOTAL SALES UNITS - BREAEVEN SALE UNITS

= 125,000 UNITS - 99,060 UNITS

= 25,940