Question

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Monterey Co. makes and sells a single product. The current selling price is $15 per unit. Variable expenses are $9 per unit, and fixed expenses total $34,300 per month. (Unless otherwise stated, consider each requirement separately.)

Required:

a. Calculate the break-even point expressed in terms of total sales dollars and sales volume. (Do not round intermediate calculations.)

	Break-even sales                  Break-even volume units

b. Calculate the margin of safety and the margin of safety ratio. Assume current sales are $100,750. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.)

	Margin of safety                         Margin of safety of ratio %

c. Calculate the monthly operating income (or loss) at a sales volume of 5,050 units per month. (Do not round intermediate calculations.

d. Calculate monthly operating income (or loss) if a $2 per unit reduction in selling price results in a volume increase to 8,000 units per month. (Do not round intermediate calculations.) e. What questions would have to be answered about the cost-volume-profit analysis simplifying assumptions before adopting the price cut strategy of part d? (Select all that apply.) Does the increase in volume move fixed expenses into a new relevant range? Does the increase in volume move variable expenses into a new relevant range? Are variable expenses really linear? Are fixed expenses really linear? f. Calculate the monthly operating income (or loss) that would result from a $1 per unit price increase and a $6,000 per month increase in advertising expenses, both relative to the original data. Assume a sales volume of 5,050 units per month. (Do not round intermediate calculations.) + The full content of this question did not transfer to your assignment. Please try again. reload

Answer 1

Answer

A.

Break-even sales   = Fixed costs/Contribution margin ratio

Break-even sales =34300/40% =$85750

Contribution margin ratio= Contribution/Sales

= $6/$15

= 40%

Break-even volume =Fixed costs/Contribution per unit

Break-even volume =34300/$6 =5717

Contribution per unit = Selling price-Variable cost

= $15-$9

= $6

B.

Margin of safety = Total sales - (Break even in units*sales price per unit)

= $100,750-5,717×$15

= $14,995

Margin of safety ratio = Margin of safety sales÷Total sales

= $14,995/$100,750

= 14.88%

C.

Monthly operating income at a sales volume of 5,050 units per month:

Sales-Costs= 5050*($15-$9) = $30300

D.

monthly operating income if a $2 per unit reduction in selling price results in a volume increase to 8,000 units per month:

Sales-Costs= 8000*($13-$9) = $32000

E.

Following questions would have to be answered about the cost-volume-profit analysis simplifying assumptions before adopting the price cut strategy of part d:

Does the increase in volume move fixed expenses into a new relevant range?

Are variable expenses really linear?

F.

the monthly operating income (or loss) that would result from a $1 per unit price increase and a $6,000 per month increase in advertising expenses. Assume a sales volume of 5,050 units per month:

Sales-Costs= 5050*($16-$9) = $35350

Note:-The monthly operating income not effected by advertising expenses.