Question
In: Accounting
Dunphy Inc. produces three models of a certain product: Standard, Deluxe, and Super. Relevant data: Standard...
| Dunphy Inc. produces three models of a certain product: Standard, Deluxe, and Super. Relevant data: | |||||||||||||
| Standard | Deluxe | Super | |||||||||||
| Sales in units | 12,000 | 5,000 | 3,000 | ||||||||||
| Price per unit | 85 | 120 | 166 | ||||||||||
| Variable cost per unit | 34 | 45 | 84 | ||||||||||
| Fixed costs are $1,000,000. | |||||||||||||
| a) | Compute Dunphy's breakeven point in sales dollars with the current sales mix. | ||||||||||||
| b) | Compute Dunphy's current margin of safety. | ||||||||||||
| c) | What is forecast net income at sales of $2,400,000 given the current sales mix? | ||||||||||||
| d) | Marketing Department has proposed a sales promotion costing $40,000 with a focus on one model only. | ||||||||||||
| Depending on which model is chosen, the promotion is expected to increase sales of Standard by 11%, Deluxe by 15%, or Super by 20%. | |||||||||||||
| Should the campaign be approved, and if so, which model should it promote? Explain, with relevant calculations. | |||||||||||||
Solutions
Expert Solution
| a) | ||||
| Standard | Deluxe | Super | Total | |
| Sales in units | 12000 | 5000 | 3000 | 20000 |
| Price per unit (a) | $85.00 | $120.00 | $166.00 | |
| Variable cost per unit (b) | $34.00 | $45.00 | $84.00 | |
| Contribution Margin per unit = a - b | $51.00 | $75.00 | $82.00 | |
| Product | Unit selling price (a) | Sales Mix | Weights (b) | Weighted Selling Price a x b |
| Standard | $85.00 | 12000 | 60.00% | $51.00 |
| Deluxe | $120.00 | 5000 | 25.00% | $30.00 |
| Super | $166.00 | 3000 | 15.00% | $24.90 |
| Total | 20000 | 100.00% | $105.90 | |
| Product | Unit Contribution Margin (a) | Sales Mix | Weights (b) | Weighted CM (a x b) |
| Standard | $51.00 | 12000 | 60.00% | $30.60 |
| Deluxe | $75.00 | 5000 | 25.00% | $18.75 |
| Super | $82.00 | 3000 | 15.00% | $12.30 |
| Total | 20000 | 100.00% | $61.65 | |
| Product | Weighted Selling Price | Weighted Contribution Margin | ||
| Standard | $51.00 | $30.60 | ||
| Deluxe | $30.00 | $18.75 | ||
| Super | $24.90 | $12.30 | ||
| Total | $105.90 | $61.65 | ||
| Contribution Margin Ratio = CM/SP = $61.65/$105.90 | 58.22% | |||
| Dunphy's breakeven point in sales dollars = Fixed Cost/Contribution margin ratio = $1,000,000/58.22% | $1,717,761.56 | |||
| b) | ||||
| Actual sales volume = 20,000 x $105.90 | $2,118,000.00 | |||
| BEP sales Dollar | -$1,717,761.56 | |||
| Margin of safety (Actual sales - BEP) | $400,238.44 | |||
| c) | ||||
| BEP Dollars = FC + Desired Profit / CM Ratio | ||||
| BEP Dollars = $1,000,000 + $2,400,000 / 58.22% | $5,840,389.29 |
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