Question

The vice-president of sales and marketing, Madison Tremblay, is trying to plan for the coming year in terms of production needs to meet the forecasted sales. The board of directors is very supportive of any initiatives that will lead to increased profits for the company in the upcoming year. Waterways markets a simple water controller and timer that it mass-produces. During 2020, the company sold 320,000 units at an average selling price of $8 per unit. The variable expenses were $1,440,000, and the fixed expenses were $721,000.

What is the product’s contribution margin ratio? (Round answer to 2 decimal places, e.g. 22.25%.) Contribution margin ratio %

What is the company’s break-even point in units and in dollars for this product? (Round intermediate calculations to 2 decimal places, e.g. 15.25 or 15.25% and final answers to 0 decimal places, e.g. 5,275.) Break-even point in units units Break-even point in dollars $

What is the margin of safety, both in dollars and as a ratio? (Round ratio to 2 decimal places, e.g. 25.25%.) Margin of safety in dollars $ Margin of safety ratio %

If management wanted to increase income from this product by 10%, how many additional units would the company have to sell to reach this income level? (Round answer to 0 decimal places, e.g. 5,275.) Waterways would have to sell an additional units

If sales increase by 64,000 units and the cost behaviours do not change, how much will income increase on this product? Income will increase by $

Answer 1

Sol: Calculation of various parts of question is as follows :-

1) Calculation of Contribution & Contribution ratio :-

2) Calculation of BEP in units & dollars :-

3) Calculation of Margin of Safety in dollars & ratio :-

* Here the total sales is considered as 100 & BEP sales are deducted from it to get MOS sales ratio.
BEP sales % = BEP sales/Total sales * 100

4) Calculation of additional units to be sold for earning 10% extra income :-

So additional units to be sold = 331400-320000 = 11400 units.
Here Desried contribution = Net profit required + Fixed costs
so Desried contribution = (39900*1.10) + 721000 = $ 1159900.

5)Calculation of increase in income after increase in sales by 64000 units & other factors remaining constant :-

Increase in income = $632000 - $399000 = $ 224000