Question

Joe Vandal LLC. last year’s sales were $10million. The company spends $3.5 million for purchase of direct materials and $2.5 million for direct labor. Overhead is $3.5 million, and profit is $500,000. Direct labor and direct material vary directly with sales, but overhead does not. The company wants to double its profit.

1. By how much should the firm increase annual sales?
2. By how much should the firm decrease material costs?
3. By how much should the firm decrease labor cost?

Please shown your answer with clearly laid-out table format with numbers labeled.

Answer 1

1. Computation of increase in sales require

Contribution Margin Ratio=(sales-Variable cost)/Sales

= (10 million- 3.5 Million-2.50 Million)/10 Million=40%

Contribution require= Fixed Cost + expected Profit

=$3.50 Million+$1 Million=$4.50 Million

Sales to be increased= Contribution required/ CM Ratio

=$4.50 Million/40% = $11.25 Million

2. Computation of amount material cost decrease

Sales=10 Million

Contribution Required= 4.50 Million

Variable cost=Sales- contribution

=10 million-4.5 Million= 5.5 Million

Variable cost= Material + Labour

Expected material Cost= Variable cost- Labour cost

=5.5 Million- 2.5 Million=3 Million

Existing Material Cost = 3.50 Million

Material cost should be decreased by = 3.50 million- 3 Million= 0.5 Million

3. Computation of amount Labour cost decrease

Sales=10 Million

Contribution Required= 4.50 Million

Variable cost=Sales- contribution

=10 million-4.5 Million= 5.5 Million

Variable cost= Material + Labour

Expected Labour Cost= Variable cost- Material cost

=5.5 Million- 3.5 Million=2 Million

Existing Labour Cost = 2.50 Million

Labour cost should be decreased by = 2.50 million- 2 Million= 0.5 Million