Question

Knight Corporation produces and sells one product. Knight has provided the following annual per unit cost data at an activity level of 100,000 units: $ Per Unit Sales 100.00 Direct labor 25.00 Direct material 30.00 Variable manufacturing overhead 10.00 Fixed manufacturing overhead 20.00 Variable selling expenses 5.00 Fixed selling expenses 4.00 Fixed administrative expenses 8.00 The relevant range for is 90,000 - 120,000 units. You will be given facts for three different options. Using the facts given, calculate amounts as directed below. Take each option independent of the others (start with the original information given for each). You must enter your answer in the following format: $x,xxx At the current level of activity, calculate the following: Total sales revenue Blank 1 Total contribution margin Blank 2 Total fixed expenses Blank 3 Knight is thinking about taking a price reduction approach to increasing net income. The company believes that a 5% reduction in sales price will increase volume by 10%. Simultaneously, there will be a change in suppliers for direct material that will result in lowering direct material costs by 10%. Calculate the following: Total sales revenue Blank 4 Total contribution margin Blank 5 Total fixed expenses Blank 6 Knight is also considering an approach that will not alter sales price. The company believes that by laying off non-productive workers they can reduce direct labor to 20% of sales. Combined with a $5,000 increase in advertising per month, they estimate sales will increase 2% over current sales. Calculate the following: Total sales revenue Blank 7 Total contribution margin Blank 8 Total fixed expenses Blank 9

Answer 1

OPTION-1: Sales at current Level of Activity
CONTRIBUTION INCOME STATEMENT
					AMOUNT $
Sales revenue (100,000 units@$100 per unit)					10,000,000
Less: Variable Cost
Direct Material (100,000 units@$30)					3,000,000
Direct labour (100,000 units@$25)					2,500,000
Variable manufacturing overheads (100,000 units@$10)					1,000,000
Variable Selling expense(100,000 units@$5)					500,000
Total variable cost					7,000,000
Total Contribution margin					3,000,000
Less: Total Fixed cost
Fixed manufacturing OH (100,000 units@20)					2,000,000
Fixed selling expense (100,000 units@4)					400,000
Fixed Admin Expense (100,000 units@8)					800,000
Total Fixed cost					3,200,000
Net operating loss					-200,000
OPTION-2 5% reduction in Sselling price increase volume by 10%
Revised selling price $ 95
Revised sales volume is 110,000 units
Revised direct material cost $27 per unit
CONTRIBUTION INCOME STATEMENT
					AMOUNT $
Sales revenue (110,000 units@$95 per unit)					10,450,000
Less: Variable Cost
Direct Material (110,000 units@$27)					2,970,000
Direct labour (110,000 units@$25)					2,750,000
Variable manufacturing overheads (110,000 units@$10)					1,100,000
Variable Selling expense(110,000 units@$5)					550,000
Total variable cost					7,370,000
Total Contribution margin					3,080,000
Less: Total Fixed cost
Fixed manufacturing OH					2,000,000
Fixed selling expense					400,000
Fixed Admin Expense					800,000
Total Fixed cost					3,200,000
Net operating loss					-120,000
OPTION-3 Reduce direct labour to 20% of sales
Revised direct labour cost per unit (100*20%) = $20
Advertisement expense =5000*12 = $60,000
Sales volume =100,000+2% = 102,000 units
CONTRIBUTION INCOME STATEMENT
					AMOUNT $
Sales revenue (102,000 units@$100 per unit)					10,200,000
Less: Variable Cost
Direct Material (102,000 units@$30)					3,060,000
Direct labour (102,000 units@$20)					2,040,000
Variable manufacturing overheads (102,000 units@$10)					1,020,000
Variable Selling expense(102,000 units@$5)					510,000
Total variable cost					6,630,000
Total Contribution margin					3,570,000
Less: Total Fixed cost
Fixed manufacturing OH					2,000,000
Fixed selling expense (400,000+60,000)					460,000
Fixed Admin Expense					800,000
Total Fixed cost					3,260,000
Net operating income					310,000