Question

Viejol corporation has collected the following information after its first year of sales. Sales were 1,600,00 on 100,00 units, selling expenses 250,000 940, variable and 60% fixed) direct materials 490,00, direct labor 290,000, administrative expenses 270,000 ( 20% variable and 80% fixed), and manufacturing overhead 380,000( 70% variable and 30% fixed). Top management asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.

1. compute contribution margin for the current year and projected year, and compute the fixed costs for the current year. ( assuming fixed costs will remain the same in the projected year.

2. compute the break-even point in units and sales dollars for the current year

3. the company has a target income of200,000. What is required sales in dollars for the company to meet its target?

4. if the company meets its target income number, by what percentage could its sales fall before it is operating at a loss. What is the margin of safety ratio?

Answer 1

1.

Contribution margin for current year	$400,000
Contribution margin for projected year	$440,000
Fixed cost	$480,000

Explanation:-

Current year cost:
	Variable	Fixed
Direct Materials	$490,000
Direct labor	$290,000
Selling expense	$100,000 ($250,000 ×40%)	$150,000 ($250,000 ×60%)
Administrative expenses	$54,000 ($270,000 × 20%)	$216,000 ($270,000 ×80%)
Manufacturing overhead	$266,000 ($380,000 ×70%)	$114,000 ($380,000 ×30%)
Total	$1,200,000	$480,000

Contribution margin for current year = sales - Variable expenses

Contribution margin for current year = $1,600,000 - $1,200,000

Contribution margin for current year = $400,000

Contribution margin for projected year = sales - Variable expenses

Contribution margin for projected year = ($1,600,000 +10%) - ($1,200,000 + 10%)

Contribution margin for projected year = $1,760,000 - $1,320,000

Contribution margin for projected year = $440,000

2.

Break-even points in unit	120,000 units
Break-even points in dollar	$1,920,000

Explanation:-

Contribution margin per unit = Contribution margin/ Total units

Contribution margin per unit = $400,000/100,000

Contribution margin per unit = $4 per unit

Break-even points in units = Fixed expense/ Contribution margin per unit

Break-even points in units = $480,000/$4

Break-even points in units = 120,000 units

Sales per unit = sales/ units

Sales per unit = $1,600,000/100,000

Sales per unit = $16 per unit

Break-even points in dollar = Break-even points in units × sales per unit

Break-even points in dollar = 120,000 × $16

Break-even points in dollar = $1,920,000

3.

Sales dollars required to meet its target income

$2,720,000

Explanation:-

Target income = $200,000

Contribution margin ratio = (Contribution margin per unit/ sales per unit) ×100

Contribution margin ratio = ($4/$16) ×100

Contribution margin ratio = 25%

Sales dollars required to meet target Income = (Target income + Fixed expense) / Contribution margin ratio

Sales dollars required to meet target income = ($200,000 + $480,000)/25%

Sales dollars required to meet target income = $680,000/25%

Sales dollars required to meet target income = $2,720,000

4.

Margin of safety ratio

29.41%

Explanation:-

Margin of safety ratio = (Expected sales - Break-even sales)/ Expected sales

Margin of safety ratio = ($2,720,000 - $1,920,000)/$2,720,000

Margin of safety ratio = $800,000/$2,720,000

Margin of safety ratio = 29.41%