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Draaksh Corporation sells premium quality wine for $120 per bottle. Its direct materials and direct labour...

Draaksh Corporation sells premium quality wine for $120 per bottle. Its direct materials and direct labour costs are $23 and $13.00 respectively per bottle. It pays its direct labour employees a wage of $26 per hour. The company performed a regression analysis using the past 12 months’ data and established the following monthly cost equation for manufacturing overhead costs using direct labour hours as the overhead allocation base: y = $155,200 + $23.50x Draaksh believes that the above cost estimates will not substantially change for the next fiscal year. Given the stiff competition in the wine market, Draaksh budgeted an amount of $34,800 per month for sales promotions; additionally, it has decided to offer a sales commission of $6.25 per bottle to its sales personnel. Administrative expenses are expected to be $25,400 per month. Required: 1. Compute the expected total variable cost per bottle and the expected contribution margin ratio. 2. Compute the annual break-even sales in units and dollars. (Round your intermediate and final answers to the whole number.) 3. Draaksh has budgeted sales of $8.9 million for the next fiscal year. What is the company’s margin of safety in dollars and as a percentage of budgeted sales? (Round your intermediate and final answers to the whole number.)

Solutions

Expert Solution

Given:

Monthly cost equation for manufacturing overhead costs using direct labor hours as the overhead allocation base: y = $155,200 + $23.50x

Direct labor hour required per bottle = Direct labor cost per bottle / Direct labor cost per hour = $13.00/$26 = 0.5 hour

Hence variable manufacturing overhead = $23.50 * 0.5 = $11.75

Expected total variable cost per bottle:

Direct material = $23.00

Direct labor = $13.00

Variable manufacturing overhead = $11.75

Sales commission per bottle =$6.25

Total variable cost per bottle =$53.00

Contribution margin = sale price - variable cost = $120 - $53 = $67

Contribution margin ratio = (Contribution margin / sale price) *100 = ($67 /$120) * 100= 55.83%

Answer 2:

Fixed costs per year:

Fixed manufacturing overhead= $155,200*12= $1,862,400

Sales promotion= $34,800 * 12 = $417,600

Administrative expenses = $25,400 *12 =$304,800

Total fixed cost = $2,584,800

Annual break-even sales in units = Fixed costs /Contribution margin = $2,584,800 / $67 = 38,579

Annual break-even sales in dollars = Fixed costs / Contribution margin ratio = $4,629,493

Answer 3:

Budgeted sales = $8,900,000

Breakeven sales = $4,629,493

Margin of safety in dollars = Budgeted sales - Breakeven sales = $8,900,000 - $4,629,493 = $4,270,507

Margin of safety as a percentage of budgeted sales = $4,270,507 /  $8,900,000 = 47.98%

ekkarill92 answered 1 year ago
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