In: Accounting
Consider the following:
Product Sales Price Variable Production Cost Allocated fixed manufacturing overhead
X $40 12 36363.64
Y $60 30 29090.91
Z $92 55 14545.45
The sales ratio for X:Y:Z is 10:8:4
Total current sales (units) 16000
Additionally, average cost data for two levels of sales volume are as follows:
Sales Volume (units) 10,000 30000
Administration Expense (per unit) $18 6
Sales & Marketing (per unit) $12 12
Other Operating Expense $2.40 1.8
ABC company is subject to a 40% income tax rate.
X company's current margin of safety is:
How many units of Product Y does ABC need to sell to earn a after-tax income of $48,000: ?
Answer
Step:1 - Identification of Type of cost (Variable, Fixed, Mixed)
Sales Volume | 10000 | 30000 | Cost type |
Administration Expense | $18 | $6 | Fixed |
Sales & Marketing | $12 | $12 | Variable |
Other Operating Expense | $2.40 | $1.80 | Mixed |
a) Administration Expense is fixed expense because total cost remain the same and per unit amount is changes.(10000 x $18 = $180,000 or 30000 x $6 = $180,000)
b) Sales & Marketing is variable expense because variable cost changes with the change in the volume and per unit cost remain same.
c) For Mixed cost, Variable cost and fixed cost needs to be seperated using High-Low Method.
Total Operating cost at 10000 = 10000 x $2.40 = $24,000
Total Operating cost at 10000 = 30000 x $1.80 = $54,000
Variable Cost per unit = (Highest activity cost−Lowest Activity Cost ) / Highest activity units − Lowest Activity Units
Variable Cost per unit = ($54,000 - $24,000) / 30000 - 10000
Variable Cost per unit = $30,000 / 20000 = $1.50 per unit
Fixed Cost = Highest activity cost − (Variable Cost × Highest activity units)
Fixed Cost = $54,000 - ($1.5 x 30000)
Fixed Cost = $9,000
So,
Variable Other Operating Expense = $1.5 per unit
Fixed Other Operating Expense = $9,000
Step:2- Calculation of Total Fixed Cost
Particulars | Amount | |
A | Allocated fixed Manufacturing overhead | |
X | $36,363.64 | |
Y | $29,090.91 | |
Z | $14,545.45 | |
Total | $80,000.00 | |
B | Administration Expense | $1,80,000.00 |
C | Fixed Other Operating Expense | $9,000.00 |
Total Fixed Cost(A+B+C) | $2,69,000.00 |
Step:3 - Calculation of Breakeven Point
X | Y | Z | Total | |
Sales price | $40.00 | $60.00 | $92.00 | |
Variable Production cost | $12.00 | $30.00 | $55.00 | |
Variable Sales & Marketing | $12.00 | $12.00 | $12.00 | |
Variable Other Operating Expense | $1.50 | $1.50 | $1.50 | |
Total Variable Cost per unit | $25.50 | $43.50 | $68.50 | |
Contribution margin per unit | $14.50 | $16.50 | $23.50 | |
Multiply by Sales Mix | 10.00 | 8.00 | 4.00 | 22.00 |
Weighted Average Contribution margin per unit |
$6.59 [$14.50 x (10/22)] |
$6.00 [$16.50 x (8/22)] |
$4.27 [$23.50 x (4/22)] |
$16.86 |
Break-Even Point in units= Total Fixed Cost / Weighted Average Contribution margin per unit
Break-Even Point in units = $269,000 / $16.86
Break-Even Point in units = 15,955 Units
Step : 4 - Calculation of Margin of Safety
Margin of Safety = Total Sales - Break even sales
Product | Sales Mix | Sales Unit | Break even units | Sales Price | Actual Sales | Break Even Sales |
X | 10 | 7273 | 7252 | $40 | $2,90,920 | $2,90,080 |
Y | 8 | 5818 | 5802 | $60 | $3,49,080 | $3,48,120 |
Z | 4 | 2909 | 2901 | $92 | $2,67,628 | $2,66,892 |
Total | 22 | 16000 | 15955 | $9,07,628 | $9,05,092 |
Margin of Safety = $907,628 - $905092= $2536
Step:5 - Calculation of Units to sold to earn after tax
profit of $48,000
Target Sales in Unit = (Total Fixed Cost + Net Income Before Tax) / Weighted Average Contribution margin per unit
= ($269,000 + 48000/1-40%) / $16.86
= ($269,000 + $80,000) / $16.86
Target Sales in Unit = 20700 units
Multiply above units with sales mix 10:8:4
X = 20695 x 10/22 = 9409 units
Y = 20695 x 8/22 = 7527 units
Z = 20695 x 4/22 = 3764 units
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