Question

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ANDERSON, INC. manufactures sandals. In preparing for next year's operations, management has developed the following estimates:

		Total	Per Unit (Pair)
	Sales (30,000 pairs)...............................................................................................................	$1,050,000	$35.00
	Direct materials (variable)...............................................................................................................	300,000	10.00
	Direct labor (variable)...............................................................................................................	150,000	5.00
	Factory overhead:
	Variable............................................................................................................	150,000	5.00
	Fixed............................................................................................................	135,000	4.50
	Selling and administrative:
	Variable............................................................................................................	90,000	3.00
	Fixed............................................................................................................	75,000	2.50

Required: Compute the following items: A. Unit contribution margin:________________ B. Contribution margin ratio: _______________ C. BEP in units (pairs): _____________ D. Break-even in sales dollars: _____________ E. The Marketing Department of ANDERSON, INC. has developed an advertising campaign that will cost $100,000. If management approves the campaign, how may pairs of sandals will it need to sell to break even? (Assume all other facts are unchanged) F. The Marketing Department has predicted that the advertising campaign will result in a 10% increase in sales volume over current sales. Would you advise management to spend the $100,000? By how much will its Net Income Before Tax change? G. (Ignore the Advertising Campaign – this is an independent situation based on the original facts). ANDERSON, INC. has found a new supplier for its direct material and they have agreed to sell them the direct material for $5.00 per unit. However, the workers (direct labor) fear that this new material is of a lower quality and will be more difficult to work with and are demanding a raise in pay. ANDERSON, INC. has agreed to raise their pay by 10%. Due to the cost savings for the direct material, ANDERSON, INC. has decided to lower its selling price to $30 per pair. ANDERSON, INC. anticipates that this reduced sales price will result in its sales volume increasing by 20%. Taking all of the above changes into consideration, what will be ANDERSON, INC.’s new break-even point in sales dollars?

Answer 1

Solution a:

Computation of Unit contribution margin - Anderson Inc.
Particulars	Amount
Selling price per unit	$35.00
Variable cost per unit:
Direct Material	$10.00
Direct Labor	$5.00
Variable factory overhead	$5.00
Variable selling and administrative expenses	$3.00
Unit contribution margin	$12.00

Solution b:

Computation of contribution margin ratio - Anderson Inc.
Particulars	Amount
Selling price per unit	$35.00
Contribution margin per unit	$12.00
Contribution margin ration (Contribution margin per unit / Selling price per unit)	34.29%

Solution c:

Total fixed cost = Fixed factory overhead + Fixed selling and administrative overhead

= $135,000 + $75000 = $210,000

Breakeven point in unit (Pairs) = Fixed cost / Contribution per unit = $210,000/$12 = 17500 pairs

Solution d:

Break even in sales dollars = BEP in units * Selling price per unit = 17500*$35 = $612,500