Question

Sunflower Company manufactures and sells a product called “Sunshine”. Using regression analysis, company has determined the monthly behavior of manufacturing, selling, and administrative costs as follows:

Total Fixed Costs        Variable per Unit

Manufacturing                         $350,000                           $2.50

Selling                         $110,000                           $1.10

Administrative                         $140,000                           $0.40

Current selling price per unit of Sunshine is $10. The production capacity is up to 300,000 units per month and currently, company is manufacturing and selling 150,000 units of Sunshine per month.

1. How much is contribution margin per unit of Sunshine?

2. What is breakeven sales in units?

3. How many units of Sunshine must company manufacture and sell in order to have $300,000 per month?

4. Currently, company is manufacturing and selling 150,000 units of Sunshine. How much Sales of company can drop before losses begin to incur? Compute in dollar and in percentage.

Answer 1

• All working forms part of the answer

	Requirement 1
A	Unit Sales price	$                10.00
B	Total Unit Variable cost [2.5 + 1.1 + 0.4]	$                  4.00
C=A-B	Contribution margin per unit	$                  6.00 per unit
	Requirement 2
A	Total Fixed Cost [350000 + 110000 + 140000]	$    6,00,000.00
B	Contribution margin per unit	$                  6.00
C=A/B	Break Even Sales in Units	100,000 units
	Requirement 3
A	Desired Profits	$    3,00,000.00
B	Total Fixed Cost [350000 + 110000 + 140000]	$    6,00,000.00
C=A+B	Total Contribution margin required	$    9,00,000.00
D	Contribution margin per unit	$                  6.00
E=C/D	Units required to be sold to have $ 300000	150,000 units
	Requirement 4
A	Current Unit Sales	150000 units
B	Sale price	$                10.00
C=AxB	Total Current Sales dollars	$ 15,00,000.00
D	Break Even Unit sales	100,000 units
E=D c B	Break Even sales dollars	$ 10,00,000.00
F = C - E	Margin of Safety Sales	$    5,00,000.00
G = F/C	Margin of Safety %	33.33%

--- Part of Requirement 4 explanation: Company’s sales can be dropped maximum by 33.33% or by 50,000 units [150,000 units x 33.33%]

If sales is decreased by more than 33.33%, Losses will begin to be incurred.