Question

Viejol Corporation has collected the following information after its first year of sales. Sales were $1,600,000 on 100,000 units, selling expenses $250,000 (40% variable and 60% fixed), direct materials $510,000, direct labor $290,600, administrative expenses $272,000 (20% variable and 80% fixed), and manufacturing overhead $350,000 (70% variable and 30% fixed). Top management has 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.

(A) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)

(B) Compute the break-even point in units and sales dollars for the current year. (Round intermediate calculations to 2 decimal places e.g. 2.25 and final answers to 0 decimal places, e.g. 1,225.)

(C) The company has a target net income of $200,000. What is the required sales in dollars for the company to meet its target? (Round answer to 0 decimal places, e.g. 1,225.)

(D) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?

Answer 1

A)Variable cost is a cost that varies with output .thus it remains constant in per unit but varies in totality with output .Fixed cost remains constant and does not varies with output ,it remains constant in totality .

	CURRENT YEAR AT 100000 UNITS	PROJECTED YEAR AT 110000 UNITS   [100000(1+.10increase )]
	Per Unit	Total	Per unit	Total
Sales	1600000/100000=16	1600000	16	16*110000=1760000
Less:Variable expenses
Direct material	510000/100000=5.10	510000	5.10	5.10*110000=561000
Direct labor	290600/100000=2.906	290600	2.906	2.906*110000= 319660
manufacturing overhead	245000/100000=2.45	350000*70%=245000	2.45	2.45*110000= 269500
selling expense	100000/100000=1	250000*40%=100000	1	1*110000=110000
Administrative expense	54400/100000=.544	272000*20%= 54400	.544	.544*110000= 59840
Total variable expense	12	1200000	12	1320000
Contribution margin	4	400000	4	440000

Fixed cost :

	FIxed cost
manufacturing overhead	350000*30%= 105000
selling expense	250000*60%= 150000
Administrative expense	272000*80%= 217600
Total fixed cost	472600

B)Contribution margin ratio = contribution /sales

                       = 4/16

                       = .25 or 25%

Breakeven point in units =Fixed cost /contribution per unit

                       = 472600 /4

                        = 118150 units

Breakeven point in sales dollars =Fixed cost/contribution margin ratio

                         = 472600 / .25

                        = $ 1890400

C)

Desired dollar sales to achieve target income =[Fixed cost +target income ]/contribution margin ratio

                             = [472600 + 200000 ]/.25

                             = 672600/.25

                            = $ 2690400

D)

Margin of safety ratio = [Actual sales to achieve target income -Breakeven sales ]/Actual sales

                          = [2690400 - 1890400 ]/ 2690400

                          = 800000/2690400

                          = .2974 or 29.74%