Question

1) Broom Brothers produces and sells one product. The firm currently sells 10,000 units per year for $90 per unit. Direct material costs are $5 per unit. Direct labor costs are $10 per unit. Variable manufacturing cost are $15 per unit. Fixed manufacturing costs are $150,000. Variable selling costs are $15. Variable administrative costs are $5 per unit. Fixed selling costs are $50,000

a) What is breakeven sales in units? What is breakeven sales in dollars?

b) What is the margin of safety in units? What’s the margin of safety in dollars?

c) What is the degree of operating leverage?

d) If sales increase to 15,000 units per year, profits will increase by ____%.

e) How many units would the firm have to sell to earn profits of $100,000?

f) The firm is considering purchasing a machine to automate its production process, which would reduce variable costs by $20 per unit. At the current sales volume of 10,000 units, what is the maximum the firm should be willing to pay for this machine?

Answer 1

Answer;-

Calculation of breakeven sales in units and breakeven sales in dollars.

1.Break even Sales in Units

Calculated by dividing the total fixed costs of production by the price per unit less the variable costs to produce the product

Fixed Overhead Cost/ contribution per unit

Fixed Overhead = $150000+$50000 = $ 2,00,000

Fixed (Manufacturing cost + Selling Cost)

Contribution Per Unit = Price per unit - Varible cost per unit

Price = $ 90

Varibale cost ;-

Direct Material = 5

Direct Labour = 10

Variable manufacturing cost = 15

varibale Selling cost = 15

Variable Administrative cost = 5 per unit

Total Varible cost = ( 5+10+15+15+5) = $50

contribution = 90-50 = $40

BREAK EVEN SALES IN Units =

Fixed Overehead costs / Contribution per unit

$200000/$40 = 5000 units

2. Break Even Sales in Sales Vaue

5000 units X Sales Price

5000 X $90 = $450000

b) What is the margin of safety in units? What’s the margin of safety in dollars?

The margin of safety formula is calculated by subtracting the break-even sales from the budgeted or projected sales. This formula shows the total number of sales above the breakeven point. In other words, the total number of sales dollars that can be lost before the company loses money.

1. Margin of Safety = Actual Sales Units - Break EVen Sales Units

=10000 - 5000 = 5000 units Margin of Safety in units

2. Margin Safety in sales value ;-

Margin of safety in units X Sales Price

= 5000 X $ 90 = $4,50,000.

e) How many units would the firm have to sell to earn profits of $100,000?

Required Profit = $100000

Fixed cost = $200000

Total contribution required = Fixed costs + profit required

= 200000 + 100000 = $ 3,00,000

Total sales unit to acheive this level of Contribution = Required Contribution / Contribution Per unit

= $ 3,00,000/ $40

= 7500 units Answer