Question

Baird Corporation sells hammocks; variable costs are $72 each, and the hammocks are sold for $133 each. Baird incurs $373,200 of fixed operating expenses annually.

Required

1. a1. Determine the sales volume in units and dollars required to attain a $66,000 profit.

2. a2. Prepare an income statement using the contribution margin format.

3. b. Baird is considering implementing a quality improvement program. The program will require a $10 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plans to spend an additional $11,850 for advertising. Assuming that the improvement program will increase sales to a level that is 4,500 units above the amount computed in Requirement a, prepare a budgeted income statement using the contribution margin format.

4. c. Determine the new break-even point in units and sales dollars as well as the margin of safety percentage, assuming that the quality improvement program is implemented.Do not round intermediate calculations. Round your answers to nearest whole number. Round "Margin of safety" answer to 1 decimal place. (i.e., 0.234 should be entered as 23.4))

Answer 1

Solution :-

a1.

Target profit = $ 66,000

Fixed operating expenses = $ 373,200

Contribution margin = Fixed expenses + Target profit

= $ 373,200 + $ 66,000 = $ 439,200

Selling price per unit	$133
Less : Variable costs	$ 72
Contribution margin per unit	$ 61

Sales volume in units = Total contribution margin/ Contribution margin per unit

= $ 439,200 / $ 61= 7200 units

Sales volume in dollars = 7200 units * $ 133 per unit = $ 957,600

a2.

Income statement

	Amount	Per unit
Sales (7200 units)	$ 957,600	$ 133
Less : Variable costs	$ 518,400	$ 72
Contribution margin	$ 439,200	$ 61
Less : Fixed Costs	$ 373,200
Net income	$ 66,000

b.

New variable cost per unit = $72 + $10  = $ 82

New fixed expenses = $373,200 + $ 11,850 = $ 385,050

New sales volume = 7,200 units + 4,500 units = 11,700 units

Budgeted income statement

	Amount	Per unit
Sales (11,700 units)	$ 1,556,100	$ 133
Less : Variable costs	$ 959,400	$ 82
Contribution margin	$ 596,700	$ 51
Less : Fixed Costs	$ 385,050
Net income	$ 211,650

c.

Break Even ( In units ) = Total Fixed Costs / Contribution Margin per unit

= $ 385,050 / $ 51  = 7,550 units

Break Even ( in sales dollars ) = 7,550 units * $ 133 per unit = $ 1,004,150

Margin of Safety = (Current Sales Level - Break Even Point )/ Current Sales Level *100

= ( 11,700 units - 7,550 units ) / 11,700 units *100 = 35.47 %