Question

This year Cairo Company sold 30,000 units of its only product for $19.00 per unit. Manufacturing and selling the product required $115,000 of fixed manufacturing costs and $175,000 of fixed selling and administrative costs. Its per unit variable costs follow.

   

Material		$	3.50
Direct labor (paid on the basis of completed units)			2.50
Variable overhead costs			0.35
Variable selling and administrative costs			0.15

Next year the company will use new material, which will reduce material costs by 60% and direct labor costs by 40% and will not affect product quality or marketability. Management is considering an increase in the unit sales price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 35,000 units. Two plans are being considered. Under plan 1, the company will keep the price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase price by 20%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

4.

value:
20.00 points

Required information

Required:
1.	Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2. (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

   

Plan 1	$
Plan 2	$

References

WorksheetLearning Objective: 22-A1 Compute the contribution margin and describe what it reveals about a company’s cost structure.

Difficulty: 3 HardLearning Objective: 22-P2 Compute the break-even point for a single product company.

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5.

value:
20.00 points

Required information

2.

Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, profit taxes (32% rate), and net profit. (Input all amounts as positive values. Round your contribution margin ratio to 2 decimal place, other intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount. Omit the "$" sign in your response.)

  

CAIRO CO. Forecasted Contribution Margin Income Statement
	Plan 1	Plan 2
(Click to select)Factory maintenanceTaxes on factorySales commissionsSalesRent on factory	$	$
(Click to select)Office equipment leaseRent on factorySales commissionsFactory maintenanceVariable costs
(Click to select)Contribution marginGross profit
(Click to select)Office equipment leaseFactory maintenanceRent on factoryFixed costsSales commissions
(Click to select)Rent on factoryFactory maintenanceSales commissionsOffice equipment leaseIncome before taxes
(Click to select)Income taxesFactory maintenanceSales commissionsOffice equipment leaseRent on factory
(Click to select)Net incomeNet loss	$	$

Answer 1

Answer 1:

On Reduction of material costs by 60%, material cost per unit = $3.50 * (1 - 60%) = $1.40

On Reduction of direct labor costs by 40%, direct labor cost per unit = $2.50 * (1-40%) = $1.50

Variable overhead costs per unit (remains same) = $0.35

Variable selling and administrative costs per unit (remain same) =$0.15

Total variable cost per unit = $1.40 + $1.50 + $0.35 + $0.15 = $3.40

Fixed manufacturing costs = $115,000

Fixed selling and administrative costs.= $175,000

Total Fixed cost = $115,000 + $175,000 = $290,000

Plan 1:

Selling price per unit (remains same) = $19

Contribution per unit = $19 - $3.40 = $15.60

Contribution margin = $15.60 / $19 = 81.11%

Break-even point in dollar sales = Fixed cost / Contribution margin = $290,000 / 81.11% = $353,205.12

Plan 2:

Sale price will increase price by 20% = $19 *(1 +20%) = $22.80

Break-even point = $290,000 / [($22.80 - $3.40) / $22.80] = $340,824.74

Break-even point in dollar amount for plan 1 and plan 2:

Answer 2:

Forecasted contribution margin income statement is as below: