Question

Cascade Company estimated the following variable and fixed cost for the only product it produces:

	Variable Cost Per Unit	Fixed Cost
Direct Materials	$132.30	$ 0
Direct Labor	$115.30	$ 0
Factory Overhead	$24.50	$264,000
Sales Salaries and Commissions	$12.70	$245,000
Advertising	$0	$75,000
Travel	$0	$39,500
Misc. Selling Expenses	$6.70	$24,500
Office and Officer Salaries	$0	$220,000
Supplies	$6.30	$15,000
Misc. Administrative Expenses	$2.20	$17,000

1) Prepare an estimated Contribution Margin Income Statement for the year ended December 31, 2018. (6,000 units are to be produced and sold). Assume the estimated sales price will be $500 per unit. Include one category for variable cost and one category for fixed cost.

2) Compute the break-even point in units and sales dollars

3) Compute the break-even point in units and sales dollars assuming the changed facts below:

(The sales staff will now handle all of the advertising cost and their sales commission will be increased to 10% of every sales dollar. Remember, the sales price per unit is $500.

The sales staff will also have their fixed salaries decrease by $100,000.

All other facts will remain unchanged.)

4) Which alternative would you select assuming that Cascade will sell at least 5,000 units? Why?

5) Referring to the original facts; what is the sales in units and sales dollars required to generate a 12% Operating Income as a percentage of Sales?

Answer 1

1.

	contribution margin Income statement 31s4 2018
	Particulars	Amt $
	Units Sold	6000
	Sales (500*6000)	3000000
less	variable costs:
	Direct Material (132.30*6000)	793800
	Direct Labor (115.30*6000)	691800
	Factory overhead (24.50*6000)	147000
	Sales salaries and commission (12.70*6000)	76200
	Misc. selling expenses (6.70*6000)	40200
	Supplies (6.30*6000)	37800
	Misc. administrative Expense (2.20*6000)	13200
	Total Variable cost	1800000
	Contribution (Sales - total variable cost)	1200000
less	Fixed cost:
	Factory overhead	264000
	Sales salaries and commission	245000
	Advertising	75000
	Travel	39500
	Misc. selling expenses	24500
	Office and officer slaries	220000
	Supplies	15000
	Misc. Administrative Expenses	17000
	Total Fixed cost	900000
	Net operating income (Contribution - total fixed cost)	300000

2. BEP = Fixed cost / Selling price per unit - variable cost per unit

= 900000/(500-200)

= 900000/300

= 3000 units

in $ = 3000*500 = 1500000

3. computation of BEP after changing the facts below in question -

contribution income statement after changes -

	contribution margin Income statement 31s4 2018
	Particulars	Amt $
	Units Sold	6000
	Sales (500*6000)	3000000
less	variable costs:
	Direct Material (132.30*6000)	793800
	Direct Labor (115.30*6000)	691800
	Factory overhead (24.50*6000)	147000
	Sales salaries and commission (3000000*10%)	300000
	Misc. selling expenses (6.70*6000)	40200
	Supplies (6.30*6000)	37800
	Misc. administrative Expense (2.20*6000)	13200
	Total Variable cost	2023800
	Contribution (Sales - total variable cost)	976200
less	Fixed cost:
	Factory overhead	264000
	Sales salaries and commission (245000-100000)	145000
	Advertising (75000-75000) as handled by sales staff	0
	Travel	39500
	Misc. selling expenses	24500
	Office and officer slaries	220000
	Supplies	15000
	Misc. Administrative Expenses	17000
	Total Fixed cost	725000
	Net operating income (Contribution - total fixed cost)	251200

now BEP = 725000/(500-337.3)

= 725000/337.3

= 2149.42 units

in sales $ = 2149.42*500 = 1074711

4. contribution income statemet when unit sold = 5000 units

	contribution margin Income statement 31s4 2018				contribution margin Income statement 31s4 2018
	Particulars	Amt $			Particulars	Amt $
	Units Sold	5000			Units Sold	5000
	Sales (500*6000)	2500000			Sales (500*6000)	2500000
less	variable costs:			less	variable costs:
	Direct Material (132.30*6000)	661500			Direct Material (132.30*6000)	661500
	Direct Labor (115.30*6000)	576500			Direct Labor (115.30*6000)	576500
	Factory overhead (24.50*6000)	122500			Factory overhead (24.50*6000)	122500
	Sales salaries and commission (12.70*6000)	63500			Sales salaries and commission (2500000*10%)	250000
	Misc. selling expenses (6.70*6000)	33500			Misc. selling expenses (6.70*6000)	33500
	Supplies (6.30*6000)	31500			Supplies (6.30*6000)	31500
	Misc. administrative Expense (2.20*6000)	11000			Misc. administrative Expense (2.20*6000)	11000
	Total Variable cost	1500000			Total Variable cost	1686500
	Contribution (Sales - total variable cost)	1000000			Contribution (Sales - total variable cost)	813500
less	Fixed cost:			less	Fixed cost:
	Factory overhead	264000			Factory overhead	264000
	Sales salaries and commission	245000			Sales salaries and commission (245000-100000)	145000
	Advertising	75000			Advertising (75000-75000) as handled by sales staff	0
	Travel	39500			Travel	39500
	Misc. selling expenses	24500			Misc. selling expenses	24500
	Office and officer slaries	220000			Office and officer slaries	220000
	Supplies	15000			Supplies	15000
	Misc. Administrative Expenses	17000			Misc. Administrative Expenses	17000
	Total Fixed cost	900000			Total Fixed cost	725000
	Net operating income (Contribution - total fixed cost)	100000			Net operating income (Contribution - total fixed cost)	88500

option A would be select as profit is higher.

5. as per original datarequired return 12% return = 3000000*12% = 360000

no of units sold = (900000 + 360000)/(500-300)

= 1260000/200

= 6300 units

Please comment in case of further clarification required.