Question

Beantown Baseball Company makes baseballs that sell for $13 per two-pack. Current annual production and sales are 576,000 baseballs. Costs for each baseball are as follows:

Direct material	$2.00
Direct labor	1.25
Variable overhead	0.50
Variable selling expenses	0.25
Total variable cost	$4.00
Total fixed overhead	$750,000

a. Calculate the unit contribution margin in dollars and the contribution margin ratio for the company.
Note: Round percentage to two decimal places (for example, round 32.5555% to 32.56%).
Unit contribution margin in dollars
Contribution margin ratio

b. Determine the break-even point in number of baseballs.

c. Calculate the dollar break-even point using the contribution margin ratio.
Note: Round amount to the nearest whole dollar.


d. Determine the company’s margin of safety in number of baseballs, in sales dollars, and as a percentage.
Note: Round margin of safety percentage to two decimal places (for example, round 32.555% to 32.56%).
Margin of safety in baseballs:
Margin of safety in dollars:

Margin of safety percentage:

e. (1) Compute the company’s degree of operating leverage.
Note: Round amount to two decimal places (for example, round 32.555 to 32.56).
Degree of operating leverage
(2) If sales increase by 30 percent, by what percentage would pre-tax income increase?
Note: Round to the nearest whole percentage point (for example, round 24.5% to 25%).
Percentage increase in pre-tax income

f. How many baseballs must the company sell if it desires to earn $657,600 in pretax profit?

g. If the company wants to earn $450,000 after tax and is subject to a 40 percent tax rate, how many baseballs must be sold?

h. How many baseballs would the company need to sell to break even if its fixed cost increased by $30,000? (Use original data.)

i. Beantown Baseball Company has received an offer to provide a one-time sale of 12,000 baseballs at $8.80 per two-pack to the Lowell Spinners. This sale would not affect other sales, nor would the cost of those sales change. However, the variable cost of the additional units would increase by $0.20 for shipping, and fixed cost would increase by $3,600. Based solely on financial information, should the company accept this offer? Would this amount be an incremental pre-tax profit or loss?
Note: Do not use a negative sign with your answer.

$
The company should accept or reject the offer?

Answer 1

Solution a) Variable cost = Direct material cost + Direct labor + Variable overhead + variable selling cost

= $2.00 + $1.25 + $0.50 +$0.25

= $4

Selling price for pack of two balls is $13

Selling price of one ball = $13 / 2

= $6.5

Contribution margin in units = selling cost per unit - variable cost per unit

Contribution margin in units = $6.5 - $4

= $2.5

Contribution margin in dollars = $2.5 * 576000

= $1,440,000

Contribution margin ratio = (contribution per unit / selling price per unit) * 100

= ($2.5/$6.5) *100

= 38.46% (answer)

Solution b)

Break even point = Fixed cost / contribution per unit

= $750000 / $2.5

= 300,000 baseballs

Solution c)

Break even point in dollars = Fixed expenses / contribution margin ratio

= $750000 / 38.46%

= $1950078 ( answer)

Solution d)

Margin of safety in baseballs = Actual sales(units) – break even sales( in units)

= 576000 – 300000

=276000 (answer)

Margin of safety in dollars: = actual sales in dollars – break even sale in dollars

= $3,744,000 – 1,950,078

= $1,793,322

(Actual sales value = 576000 units * $6.5 per unit cost = $3,744,000)

Margin of safety percentage: [(current sales level – break even sales) / current sales level] *100

= [($3744000 – 1950078) / $3744000]*100

= 47.91% (answer)