Question

The Auto Supply manufactures memory cards that sell to wholesalers for $2.00 each. Variable and fixed costs are as follows: Variable Costs per card: Fixed Costs per Month: Manufacturing Factory overhead $7,000 Direct materials $0.30 Selling and admin. 3,000 Direct labor 0.25 Factory overhead 0.25 $0.80 Selling and admin. 0.15 Total $0.95 Total $10,000 Auto Supply produced and sold 10,000 cards during October 2018. There were no beginning or ending inventories. Required: a) Prepare a contribution income statement for the month of October. b) Determine Auto Supply’s monthly break-even point in units. c) Determine the effect on monthly profit of a 1,000 unit increase in monthly sales. d) If Auto Supply is subject to an income tax of 40 percent, determine the dollar sales volume required to earn a monthly after-tax profit of $15,000.

Answer 1

a.

The Auto Supply
Contribution Income Statement
For the Month Ending October 31, 2018
Sales ($2 x 10,000)		$20,000
Less variable costs:
Direct materials ($0.30 x 10,000)	$3,000
Direct labor ($0.25 x 10,000)	2,500
Variable factory overhead ($0.25 x 10,000)	2,500
Selling and admin. ($0.15 x 10,000)	1,500	9,500
Contribution margin		$10,500
Less fixed costs:
Factory overhead	$7,000
Selling and administrative	3,000	10,000
Profit		$500

b. Unit selling price $2.00
  Less unit variable costs 0.95
  Unit contribution margin $1.05

Break-even point = Fixed Costs / Unit contribution margin = $10,000 / $1.05 = 9,524 units

c. Increase in unit sales 1,000
  Unit contribution margin x $1.05
  Increase in monthly profits $1,050

d. Desired before-tax profit = $15,000 / (1 - 0.40) = $25,000
Contribution margin percentage = $1.05 / $2.00= 52.5%
Required sales volume = ($10,000 + $25,000) / 0.525 = $66,667