Question

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?

Answer 1

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