Question

2) A corporation sells 66,000 units of a product for $19.75 each; the variable cost per unit is $11.50 each. The fixed costs are $315,000.

Required A) breakeven units and dollars.

B) how many units must be sold to achieve targeted income of $465,0007

C) What is the margin of safety in dollars and percentage?

D) What is the operating leverage?

E) The sales manager wants to raise prices by $2.00 each; demand will drop by ten percent, and the firm will spend an additional $95,000 on advertising. Will the firm increase income?

F) The manufacturing manager wants to automate a production line and reduce variable costs to $10.00 each. Fixed costs will increase by $75,000. Will the firm increase income?

Answer 1

Solution a:

CM per unit = $19.75 - $11.50 = $8.25 per unit

CM ratio = $8.25 / $19.75 = 41.77%

Break even units = Fixed costs / CM per unit = $315,000 / $8.25 = 38182 units

Breakeven point in dollar = Fixed costs / CM ratio = $315,000 / 41.77% = $754,130

Solution b:

units must be sold to achieve targeted income of $465,000 = (Fixed costs + Desired profit) / CM per unit

= ($315,000 + $465,000) / $8.25 = 94545 units

Solution c:

Margin of safety in dollar = Current sales - Breakeven sales = (66000*$19.75) - $754,130 = $549,370

Margin of safety percentage = Margin of safety in dollar / Current sales = $549,370 / $1,303,500 = 42.15%

Solution d:

Operating leverage = Contribution margin / Net operating income = (66000*$8.25) / (66000*$8.25 - $315,000) = 2.37

Solution e:

Current operating income = (66000*$8.25) - $315,000 = $229,500

Proposed CM per unit = $8.25 + $2 = $10.25 per unit

Proposed sales units = 66000*90% = 59400 units

New fixed costs = $315,000 + $95,000 = $410,000

New operating income = (59400*$10.25) - $410,000 = $198,850

No firm income will not be increased.

Solution f:

New CM per unit = $8.25 + ($11.50 - $10) = $9.75 per unit

New fixed costs = $315,000 + $75,000 = $390,000

New operating income = (66000*$9.75) - $390,000= $253,500

Yes, firm increase income.