Question

This year Cairo Company sold 29,000 units of its only product for $19.20 per unit. Manufacturing and selling the product required $114,000 of fixed manufacturing costs and $174,000 of fixed selling and administrative costs. Its per unit variable costs follow.

   

Material		$	3.40
Direct labor (paid on the basis of completed units)			2.40
Variable overhead costs			0.34
Variable selling and administrative costs			0.14

Next year the company will use new material, which will reduce material costs by 70% and direct labor costs by 30% 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 34,000 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 30%. This plan will decrease unit sales volume by 15%. 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)SalesRent on factoryFactory maintenanceTaxes on factorySales commissions	$	$
(Click to select)Variable costsSales commissionsRent on factoryFactory maintenanceOffice equipment lease
(Click to select)Contribution marginGross profit
(Click to select)Office equipment leaseRent on factoryFixed costsSales commissionsFactory maintenance
(Click to select)Office equipment leaseRent on factoryFactory maintenanceSales commissionsIncome before taxes
(Click to select)Factory maintenanceOffice equipment leaseIncome taxesRent on factorySales commissions
(Click to select)Net incomeNet loss	$	$

References

Answer 1

Solution 1:

Computation of contribution margin per unit and contribution margin ratio - Cairo Company
Particulars	Plan 1	Plan 2
Selling price per unit	$19.20	$24.96
Variable cost per unit:
Direct material ($3.40 * 30%)	$1.02	$1.02
Direct labor ($2.40 * 70%)	$1.68	$1.68
Variable overhead cost	$0.34	$0.34
Variable selling and administrative costs	$0.14	$0.14
Contribution margin per unit	$16.02	$21.78
Contribution margin ratio	83.44%	87.26%

Total fixed cost for next year = $114,000 + $174,000 = $288,000

Breakeven Point (Plan 1) = Fixed cost / contribution margin ratio = $288,000 / 83.44% = $345,158

Breakeven Point (Plan 2) = $288,000 / 87.26% = $330,048

Solution 2:

Cairo Company
Forecasted Contribution margin income statement
Particulars	Plan 1	Plan 2
Sales	$556,800	$615,264
Variable cost	$92,220	$78,387
Contribution Margin	$464,580	$536,877
Fixed Manufacturing Cost	$114,000	$114,000
Fixed Selling & Administrative Cost	$174,000	$174,000
Income before taxes	$176,580	$248,877
Income Tax (30%)	$52,974	$74,663
Net Income	$123,606	$174,214