Question

This year Cairo Company sold 43,000 units of its only product for $17.60 per unit. Manufacturing and selling the product required $128,000 of fixed manufacturing costs and $188,000 of fixed selling and administrative costs. Its per unit variable costs follow.

   

Material		$	4.80
Direct labor (paid on the basis of completed units)			3.80
Variable overhead costs			0.48
Variable selling and administrative costs			0.28

Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 50% 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 48,000 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 5%. 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 (30% 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)Taxes on factoryFactory maintenanceRent on factorySalesSales commissions	$	$
(Click to select)Rent on factoryOffice equipment leaseSales commissionsVariable costsFactory maintenance
(Click to select)Contribution marginGross profit
(Click to select)Sales commissionsFixed costsRent on factoryOffice equipment leaseFactory maintenance
(Click to select)Income before taxesFactory maintenanceRent on factorySales commissionsOffice equipment lease
(Click to select)Sales commissionsFactory maintenanceRent on factoryOffice equipment leaseIncome taxes
(Click to select)Net lossNet income	$	$

Answer 1

Answer 1						Answer 2
Calculation of Contribution Margin % under Plan 1 and Plan 2						A forecasted contribution margin income statement
	Plan 1	Plan 2					Plan 1         (43000 units sold)	Plan 2         (40850 units sold)
Selling price per unit	$17.60	$21.1				Sales	756,800	862,752
Less : Variable costs per unit						Less : Variable cost	217,580	206,701
- Material	$2.40	$2.40				Contribution Margin	539,220	656,051
- Direct Labor	$1.90	$1.90				Less : Fixed Costs	316,000	316,000
- Overhead	$0.48	$0.48				Income before taxes	223,220	340,051
- Selling and administrative costs	$0.28	$0.28				Less : Taxes @ 30%	66,966	102,015
Total Variable Cost per unit	$5.06	$5.06				Net Income (loss)	156,254	238,036
Contribution Margin per unit	$12.54	$16.06
Contribution Margin %	71.25%	76.04%
Break even point in sales dollars = Total Fixed Cost / Contribution Margin %
Plan 1 = Break even point in sales dollars = [$128000 + $188000]/71.25% = $4,43,509
Plan 2 = Break even point in sales dollars = [$128000 + $188000]/76.04% = $4,15,562