Question

cost value pricing

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CVP Question Catalonia Company (CC) makes silicon wafers that its salespeople sell B-to-B for $100/wafer. All salespeople get a commission equal to 10% of the revenue from the wafers they sell, and in addition, the salespeople receive a base salary of $40,000 per person. In 2017, CC had 10 sales people, and its total sales revenue was $10,000,000. The manufacturing facility used to make the wafers has a fixed cost of $2,000,000, and a variable cost of $30/wafer. CC has no other costs or revenues other than those just described. For 2018, CC plans on modifying both its production facilities and the method by which it compensates its salespeople. The modified production facilities will increase its 2017 fixed manufacturing costs by $1,000,000 (for a total of $3,000,000 in fixed manufacturing costs), but it will reduce the variable cost per wafer to $20/wafer. CC intends to retain its existing sales staff, and not hire any more, but it intends to increase their commissions to 15% of sales revenue they generate (instead of the previous 10%). The salespeople’s base salary will remain unchanged from its 2017 levels, as will the wafer’s selling price. Please answer both of the following questions: 1. Will CC’s breakeven level of sales (expressed in dollars of sales revenue) for 2018 be higher or lower than in 2017? Support your answer with computations. 2. What level of sales also (expressed in dollars) will CC have to achieve in 2018 to generate the same direct (aka: variable) costing income that it achieved in 2017?

Answer 1

1. calculation of contribution margin for 2018

Selling price	100
Varriable Sales commission	- 15
Varriable Cost of sales	- 20
contribution margin	65

Contribution Margin Ratio = Contribution / sales

                                             65 / 100 = .65%

Fixed Cost Calculation

Fixed Manufacturing Cost	3000000
Fixed Selling Cost (10 * 40000)	400000
Total Fixed Cost	3400000

Break Even Point In $ = Fixed Cost / Contribution margin Ratio

                                      3400000 / 65 = $5230769.23

2.

Selling price	100
Varriable Sales commission [100*.10]	- 10
Varriable Cost of sales	- 30
contribution margin	60

Fixed Cost Calculation

Fixed Manufacturing Cost	2000000
Fixed Selling Cost (10 * 40000)	400000
Total Fixed Cost	2400000

Unit Sold in 2017 = price / sales

                            = 10000000 / 100 = 100000 units

Contribution for 2017 = 100000 * 60 = 6000000

Net income for 2017 = contribution - fixed cost

                                    6000000 - 2400000 = 3600000

Dollar sales Required in 2018 = (Fixed Cost + income of 2017) / Contribution margin of 2018

                                                     (3400000 + 3600000) / .65 = $10769230.76