Question

Viejol Corporation has collected the following information after its first year of sales. Sales were $1,600,000 on 100,000 units, selling expenses $210,000 (40% variable and 60% fixed), direct materials $498,000, direct labor $296,600, administrative expenses $284,000 (20% variable and 80% fixed), and manufacturing overhead $378,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.

(A) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)

(B) Compute the break-even point in units and sales dollars for the current year. (Round intermediate calculations to 2 decimal places e.g. 2.25 and final answers to 0 decimal places, e.g. 1,225.)

(C) The company has a target net income of $200,000. What is the required sales in dollars for the company to meet its target? (Round answer to 0 decimal places, e.g. 1,225.)

(D) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?

Answer 1

Working notes:

	Per unit	Current year	Projected year
Unit sales		100,000	110,000 (100,000+10%)
Sales	$1,600,000/100,000 = $16	$1,600,000	$1,760,000 (110,000*$16)
Variable expenses:
Direct material	$498,000/100,000 = $4.98	498,000	547,800 (110,000*$4.98)
Direct labor	$296,600/100,000 = $2.966	296,600	326,260 (110,000*$2.966)
Variable manufacturing overhead	$264,600/100,000 = $2.646	264,600 (378,000*70%)	291,060 (110,000*$2.646)
Variable selling expenses	$84,000/100,000 = $0.84	84,000 (210,000*40%)	92,400 (110,000*$0.84)
Variable administrative expenses	$56,800/100,000 = $0.568	56,800 (284,000*20%)	62,480 (110,000*$0.568)
Total variable expenses	$12	$1,200,000	$1,320,000
Contribution margin	$4	400,000	440,000
Fixed expenses:
Fixed manufacturing overhead	113,400 ($378,000*30%)	113,400	113,400
Fixed selling expenses	126,000 (210,000*60%)	126,000	126,000
Fixed administrative expenses	227,200 (284,000*80%)	227,200	227,200
Total fixed expenses	466,600	466,600	466,600
Net income		$(66,600)	$(26,600)
A
	Current year	Projected year
Contribution margin	$400,000	$440,000
Fixed cost	466,600
B	Current year
Break even points in units = Fixed cost / Contribution per unit	$466,600 / $4 = 116,650 units
Break even points in sales dollars = Fixed cost / Contribution ratio Contribution ratio = Contribution per unit / sales per unit*100	$466,600 / 25% = $1,866,400 $4/$16*100 = 25%
C
Required sales in dollars = Fixed cost+target net income / contribution ratio	$466,600+200,000 / 25% = $2,666,400
D
Margin of safety ratio = Required sales - break even sales / Required sales	$(2,666,400-1,866,400) / 2,666,400 *100 = 30%