Question

Maxwell Company manufactures and sells a single product. Price and cost data regarding Maxwell’s product and operations for fiscal year 2016 are as follows (presented under absorption or full costing):

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Revenue (120,000 units)                                                                      $3,000,000

Less: Cost of sales

          Direct materials                                                  $1,320,000

          Directed Labor                                                        600,000

          Variable manufacturing overhead                          300,000

          Fixed manufacturing overhead                               192,000        2,412,000

Gross margin                                                                                          $588,000

Less: Variable selling expenses                                       $156,000

          Fixed selling and administrative expenses              276,000          432,000                

Net income                                                                                              $156,000

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a. Compute the number of units required to be produced and sold in order to earn direct costing profits of $260,000 in 2017; you may assume that in 2017, fixed costs, as well as per unit variable cost and (per unit) selling prices are the same as for fiscal year 2016.

b. Answer this question independently of part (a) above. Now suppose that Maxwell’s management believes that direct labor costs will increase by 8 percent in fiscal year 2017, but all other variable costs per unit, fixed costs, and selling prices will remain as in 2016. Compute the breakeven point in units for 2017 based on these assumptions.

Answer 1

• All working forms part of the answer
• Working on 2016’s data:

	Amount	Units	per unit
Revenues	$     30,00,000.00	120000	$                    25.00
Less: Variable Cost
Direct material	$     13,20,000.00	120000	$                    11.00
Direct labor	$       6,00,000.00	120000	$                       5.00
Variable manufacturing Overhead	$       3,00,000.00	120000	$                       2.50
Variable selling expenses	$       1,56,000.00	120000	$                       1.30
Total variable cost	$     23,76,000.00	120000	$                    19.80
Contribution margin	$       6,24,000.00	120000	$                       5.20
Less: Fixed Costs
Fixed manufacturing overhead	$       1,92,000.00
Fixed selling & administrative overhead	$       2,76,000.00
Total Fixed cost	$       4,68,000.00
Net Income	$       1,56,000.00

• Answers are based on above workings
• Requirement (a)

A	Desired Net Income	$       2,60,000.00
B	Total Fixed Cost	$       4,68,000.00
C=A+B	Total contribution margin desired	$       7,28,000.00
D	Unit Contribution margin	$                     5.20
E = C/D	No. of unit s to be produced and sold to earn desired profits	140,000 units

Answer = 140,000 unit

• Requirement (b)

New Labor cost will be $5 + 8% = $ 5.4 (increased by $ 0.4)

Hence, new unit contribution margin will be old unit contribution – 0.4 = $ 5.2 - $0.4 = $ 4.8

A	Desired Net Income	$       2,60,000.00
B	Total Fixed Cost	$       4,68,000.00
C=A+B	Total contribution margin desired	$       7,28,000.00
D	Unit Contribution margin	$                     4.80
E = C/D	No. of unit s to be produced and sold to earn desired profits	151,667 units

Answer = 151,667 units.