Question

Vice President for Sales and Marketing Sam Totter is trying to plan for the coming year in terms of production needs to meet the sales demand. He is also trying to determine ways in which the company’s profits might be increased in the coming year.

Instructions (Do all six parts):

Waterways markets a simple water control and timer that it mass-produces. During last year, the company sold 701,000 units at an average selling price of 4.20 per unit. The variable expenses were $1,857,650 and the fixed expenses were $646,450.

What is the product’s contribution margin ratio? (Round to nearest whole percentage.)

What is the company’s break-even point in units and in dollars for this product?

What is the margin of safety, both in dollars and as a ratio? (Round to nearest whole percentage.)

If management wanted to increase its net operating income from this product by 10%, how many additional units would have to be sold to reach this income level?

If sales increase by 51,000 units and the cost behaviors do not change, how much will net operating income increase on this product?

Waterways’ management believes that increased advertising would increase unit sales by 10%. If management wants to increase its operating income by $50,000, how much could the company spend on additional advertising to reach its goal?

Answer 1

answer)

Contribution margin ratio:

(Sales-variable costs)/sales

=[(701000 uunit×$4.2)-$1857650]/(701000 units ×$4.2)

=0.369

Break even point:

Fixed costs/(seeking price per unit-variable cost per unit)

=$646450/($4.2-($1857650/701000 unit))

=417065 units.

Margin of safety in units:

Sales-break even sales

=701000 units-417065 units

=283935 units

Margin of safety ratio:

Margin of safety/sales

=0.405

Net operating income of sales increases by 51000 units:

Particulars	$
Sales [(701000 units+51000 units) ×$4.2]	3158400
(Less)variable costs[752000 units ×(1857650$/701000 units]	(1992800)
Contribution	1165600
(Less) fixed costs	(646450)
Net operating income	519150

Net operating income at 701000 units:

Sales-varible costs-fixed costs:

(701000 units ×4.2)-$1857650-$646450

=$440100

Increase in profit:

$519150-$440100=$79050

Operating income for current level of sales:

Sales-varible costs-fixed costs

=(701000 units ×$4.2)-$1857650-$646450

=$440100

Here the net operating sales are increased by 10% and issuing income by $50000:

Sales - variables costs-additinal advertising costs-fixed costs=$440100+$50000

(701000×110%×$4.2)-(1857650$×110%)-$646450-additonal advertising costs=$490100

=additional advertising costs=$58655