Problem 3 The following information is available for Hearst Company. Sales Price $60 Variable manufacturing costs...

Problem 3
The following information is available for Hearst Company.

Sales Price				$60
Variable manufacturing costs					-34
Sales commission		10% of sales	price		-6
Fixed costs				$180,000

Answer the following questions
1	What is the contribution margin?
2	What is the CM ratio?
3	What is the income if we sell 8,000 units?
4	What is the break-even point in units?, in dollars?
5	How many units must be sold to earn $40,000
6	The tax rate is 30%. How many units must be sold to earn $45,000 after taxes?
7	A new machine will reduce variabe costs by $5 per unit.
	They are selling 12,000 units now.
8	Refer to the original data. They are currently selling 12,500 units.
	They want to lower the sales price to $56. How many units must they
	sell to earn as much as they do now with the new numbers?

Solutions

Expert Solution

1. Contribution margin = sales - variable cost = sales - (variable manufacturing costs + sales commission) = 60-(34+6)=20

2. CM ratio = contribution margin Per unit / sales price per unit = 20/60 = 33.33%

3. Income is calculated below

Sales (8000*60)...................480000

-variable cost (8000*34).....272000

-sales commission (480000*10%).....48000

Contribution margin.................160000

-fixed cost............................... 180000

Net loss.....................................20000

4. Breakeven point in units = fixed cost / contribution margin Per unit = 180000/20 = 90000 units

Breakeven point in dollars = fixed cost / contribution margin ratio = 180000/(20/60) = $540,000

5. Desired sales = (fixed cost + targeted profit) / contribution margin Per unit = (180000+40000)/20 = 110000 units

6. Income before tax = 45000/(1-30%) = 64286

Desired sales = (fixed cost + targeted profit) / contribution margin Per unit = (180000+64286) / 20 = 12214 units

7. Income is calculated as follows

Sales (8000*60).................................... 480000

- variable manufacturing cost (8000*(34-5))..................232000

- sales commission (480000*10%).......................48000

Contribution margin........................ 200000

-fixed cost........................................ 180000

Net income...................................... 20000

8. Profit = sales - variable cost - sales commission - fixed cost

20000= 56X - 29X - 5.6X - 180000

200000=21.4 X

X = 200000/21.4 = 9346 units

ekkarill92 answered 7 months ago

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