In: Accounting
The car company manufactures and sells Waxworks car polish. This expensive polish is priced at $20 per can (applicator sponge included). Car Company’s costs are:
Fixed costs (per month) Variable Costs per can
Manufacturing $500000 Manufacturing $11
Selling costs 292000 Selling 3
.Find the monthly breakeven quantity using the above data.
2.How many cans must be sold to earn $60000 per month above breakeven (before taxes)?
What is the Contribution Margin Ratio (CMR), using the costs in (2)?
4. If variable selling costs increase by 20% per can, what is the new break-even quantity, assuming $60000 per month before taxes is to be earned?
Assuming a 40% tax rate, how many cans must be sold to earn an after-tax income of $90000 above breakeven, and assuming selling costs increase 20% per can?
What is the DOL in (4) above?
1. Breakeven quantity = Total fixed costs/Contribution per unit = ($500000 + $292000)/$6 = $792000/$6 = 132000 cans
Contribution per unit = Selling price - Variable costs = $20 - ($11 + $3) = $6
2. Number of cans to be sold = (Total fixed costs + Target income)/Contribution per unit = ($792000 + $60000)/$6 = $852000/$6 = 142000 cans
3. Contribution margin ratio = Contribution margin/Sales = $6/$20 = 30%
4. Breakeven quantity = Total fixed costs/Contribution per unit = ($500000 + $292000)/$3.20 = $792000/$3.20 = 247500 cans
Contribution per unit = Selling price - Variable costs = $20 - [1.20 x ($11 + $3)] = $20 - $16.80 = $3.20
Number of cans to be sold = (Total fixed costs + Target income)/Contribution per unit = ($792000 + $60000)/$3.20 = $852000/$3.20 = 266250 cans
Number of cans to be sold = (Total fixed costs + Target income)/Contribution per unit = ($792000 + $150000)/$3.20 = $942000/$3.20 = 294375 cans
Target income = Net income/(1 - Tax rate) = $90000/(1 - 0.40) = $90000/0.60 = $150000
DOL = Contribution margin/Net operating income = (294375 x $3.20)/$90000 = $942000/$90000 = 10.47