Cost Volume Profit Analysis Sports Company manufactures basketballs. The company has a standard ball that sells...

Cost Volume Profit Analysis

Sports Company manufactures basketballs. The company has a standard ball that sells for $25. The variable cost are $ 15 per ball. Last year the company sold 30,000 balls. The fixed expenses are $ 210,000.

Required.

Prepare a Contribution Income Statement
Compute the Contribution Margin per Unit, Variable Expense Ratio and Contribution Margin Ratio
Compute the Break Even Point in dollars and units
Compute the Margin of Safety
Due to a increase in labor rates, the company estimates that variable costs will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what will be the new Contribution margin ratio and Break Even Point in balls.
Refer to data in (4) above. If the expected change in variable expense takes place, how many balls will have to be sold next year to earn the net income of $100,000 .

Refer to the original data. The company is discussing the construction of a new automated plant to manufacture the balls.. The new plant would slash variable expenses per ball by 40%, but it would cause fixed expenses to double in amount per year. If the new plant is built, what would be the company's new Contribution Margin Ratio and new Break-Even Point.

Solutions

Expert Solution

Contribution Income Statement
Sales Revenue	750,000
Less: Variable costs	450,000
Contribution Margin	300,000
Less: Fixed Expenses	210,000
Operating Income	90,000

CM per unit = 300,000/30,000 = $10

Variable Expense Ratio = Variable Expenses/Sales

= 450,000/750,000 = 60%

CM ratio = CM/Sales

= 300,000/750,000

=40%

Break point in Balls = Fixed costs/CM per unit

= 210,000/10

= 21,000 units

In Dollars = 210,000/40% = $525,000

Margin of Safety = Total Sales – Break even Sales = 750,000-525,000 = $225,000

CM Ratio = (25-15-3)/25 = 28%

Break even point = 210,000/7 = 30,000 balls

Units required to be sold = (100,000+210,000)/7 = 44,285.71 units

New CM ratio = (25 – 15*0.6)/25 = 64%

Break even point = (210,000*2)64% =$656,250

i.e. 26,250 units

ekkarill92 answered 1 year ago

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