Question

study the information provided below and answer each of the following questions independently:

3.1 Calculate the total Contribution margin and operating profit/loss

3.2 How many bags must be sold in order to break even

3.3 Calculate the margin of safety in value

3.4 Calculate the number of dresses that must be sold in order to earn a profit of 540 000

3.5 The management at Talo Limited has a strategy to reduce fixed costs by 10% and thereby drop the selling price by 30 per unit. if the sales volume also increases by 4500 units, calculate the new total contribution margin and operating profit loss.

information:

Talo limited produces and sells ladies dresses for 600 each. each dress is manufactured using 1 metre of fabric and the time required to produce each dress is 3 hours.

Fabric costs 200 per metre and the labour costs 40 per hour. variable manufacturing overheads amount to 40 per dress. salesperson receive a commission of 60 per dress. fixed manufacturing costs amount to 2 400 000 per year. annual fixed selling and administrative costs total 606 000. Talo Limited expects to produce and sell 18000 dresses for the year.

Answer 1

Solution:

Part 1 – Total Contribution margin and operating profit/loss

Contribution Margin Income Statement
	$$	Total	$ per Unit
Sales Revenue (18,000 Dress*$600)		$10,800,000	$600
Less: Variable Expenses
Direct materials (18,000 Dress*1 meter fabric*$200)	$3,600,000
Direct labor (18,000 dress*3 hours per dress * $40)	$2,160,000
Variable Manufacturing Overheads (40*18,000)	$720,000
Sales Commission ($60 * 18,000)	$1,080,000
Total Variable Expenses		$7,560,000	$420
Contribution Margin (Sales - Variable Expenses)		$3,240,000	$180
Fixed Expenses:
Fixed Manufacturing Costs	$2,400,000
Fixed Selling and administrative costs	$606,000
Total Fixed Costs		$3,006,000
Net Operating Income (Contribution Margin - Fixed Costs)		$234,000

Total Contribution Margin = $3,240,000

Net Operating Income = $234,000

Part 2 –

Number of bags must be sold in order to break even = Total Fixed Expense / Contribution Margin Per Unit

= $3,006,000 / 180

= 16,700 bags

Part 3 –

Margin of Safety in value = Total Sales Revenue – Break Even Sales in dollars

= $10,800,000 – (Break Even Units 16,700 Dress*$600 Selling Price)

= $10,800,000 – 10,020,000

= $780,000

Part 4 –

Number of dresses that must be sold in order to earn a profit of 540 000 = (Total Fixed Costs + Target Profit) / Contribution Margin per unit

= ($3,006,000 + $540,000) / 180

= 19,700 dresses

Part 5 –

Revised Quantity = 18,000 + 4,500 = 22,500

Contribution Margin Income Statement
	$$	Total	$ per Unit
Sales Revenue (18,000+4500 Dress)*$570)		$12,825,000	$570
Less: Variable Expenses
Direct materials (22,500 Dress*1 meter fabric*$200)	$4,500,000
Direct labor (22,500 dress*3 hours per dress * $40)	$2,700,000
Variable Manufacturing Overheads (40*22,500)	$900,000
Sales Commission ($60 * 22,500)	$1,350,000
Total Variable Expenses		$9,450,000	$525
Contribution Margin (Sales - Variable Expenses)		$3,375,000	$45
Less: Fixed Expenses ($3,006,000*90%)		$2,705,400
Net Operating Income (Contribution Margin - Fixed Costs)		$669,600

Total Contribution Margin = $3,375,000

Net Operating Income = $669,600

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you