Question

Lilah and Juliet’s Book Company (LJBC) sells children’s books for $10 per book.Variable costs are $6 per book.Fixed costs are $300,000 per year.

1. How many books must LJBC sell in 2013 to earn a target profit of $ 100,000?

10,000

25,000

16,667

75,000

100,000

2. Assume LJBC in fact makes their 2013 target profit. What is LJBC’s margin of safety in dollars?

a. $100,000

b. $250,000

c. $400,000

d. $300,000

e. $750,000

3. Danny’s Manufacturing Company (DMC) sells a baby’s high chair for $50. DMC has a contribution margin ratio of 40% and annual fixed expenses of $250,000. In 2012, DMC sold 10,000 high chairs. DMC was disappointed in its results and is contemplating the following actions:

Lower the selling price of its product by 10%.

Reduce the fixed salaries of salesmen by $50,000 and give salesmen a commission of $2.00 per high chair sold.

Change the manufacturing process to reduce variable costs by $8.00 per high chair produced while increasing fixed expenses by $150,000. If DMC implements this plan, they will increase sales volume by 20%. What is the impact to DMC’s profit if it implements the plan described above?

Reduce profits by $48,000.

Increase profits by $40,000.

Increase profits by $52,000.

Reduce profits by $100,000.

Increase profits by $12,000.

Could you please be kind enough and show me the solutions and answers in detail?

Thank you so much and have a good one! :D

Answer 1

Answer :

			Partuculars	amount
			sales (10perunit)	1000000
		Less	Variable cost (6 perunit)	600000
			Contribution	400000
		Less	Fixed Cost	300000
			Profit	100000
			let x be the unit
			10x-6x=400000
			4x=400000
			x= 100000
				since profit is given, we will go in reverse direction and calculate contribution and then keeping it equal to beloq equation; we will find number of units. HENCE NUMBER OF UNITS = 100000
			CALCULATION OF MARGIN OF SAFETY
			MARGIN OF SAFETY = ACTUAL SALES - SALES AT BREAKEVEN
			ACTUAL SALES = $1000000
			SALES AT BREAKEVEN = (FIXED COST / CONTRIBUTION PER UNIT ) * SALE PRICE PER UNIT
			FIXED COST = $300000
			CONTRIBUTION = $400000/100000 = $4
			SALE PRICE = $10
			SALES AT BREAKEVEN POINT =( 300000/4)*10 = $750000
			MARGIN OF SAFETY IN $ = $ 100000- $750000 = $250000
	OLD	NEW
UNIT SOLD	10000	12000	EXISTING	PROPSED
UNIT PRICE	50	45	SALES =$500000	SALES= $540000
FIXED COST	250000	350000	VC =$300000	VC=$252000
VC (PERUNIT)	30	24	CONTRIBUTION =$200000	CONTRIBUTION=$288000
CONTRIBUTION= SALES-VARIBALE COSTPROFIT= CONTRIBUTION- FIXED COST			FIXED COST= $250000	FC=$350000
			Loss = $50000	Loss=$98000
			LOSS WILL INCREASE BY $48000 = REDUCE PROFIT BY $48000