Question

C-V-P ANALYSIS Discussion Question Darin Musical Company manufactures and sells parts for musical gadgets. The business earned net income of $420,000 in 2018, when sales was 6,000 units and data for variable cost per unit and total fixed costs were as follows: Variable expenses per unit: $20 $50 $10 Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Overhead Fixed Selling Costs Fixed Administrative Costs Fixed expenses: $125,000 $75.000 $100,000 Required: i) Compute the expected selling price per unit, using the equation method. ii) Given the sales of 6,000 units, prepare a contribution margin income statement for the year ended December 31, 2018, detailing the components of total fixed costs and clearly showing contribution and net income. iii) iv) Calculate Darin's break-even point in units and in sales dollars. The recession in the economy in 2019 is expected to result in a reduction of the number of units sold. By how much can sales decline in units and sales dollars in 2019 without the company making a loss? Given the expected sales of 6,000 units, graph Darin's CVP relationships clearly showing the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating profit area, the operating loss area and the margin of safety in units and sales dollars. (Use a scale of 2 cm to represent 1,000 units on the x-axis and 2cm to represent $200,000 on the y. axis). vi) The management of Darin Musical Company's profit objective for the period is to increase operating income by 20% in 2019. They expect per unit data and total fixed costs to remain the same in 2019. Determine the number of units that must be sold to earn this target operating profit. Is this a realistic goal? vii) Assume that as a result of reorganizing the production process, Darin Musical Company was able to reduce direct material cost per unit by $5 due to a change in the supplier of raw material used in the production process but the expected sales units of 6,000 units would decrease by 10% in spite of an increase in total fixed costs of $87,000. What must the new selling price per unit be if the company wishes to meet the profit objective for 2019?

Answer 1

Sub Ques 1

Equation
Net Income	=Contribution-Fixed Expense
4,20,000	=Contribution-3,00,000
Contribution	=4,20,000+3,00,000
	=7,20,000
Contribution	=(Exp. Selling Price - Variable Exp)*No. of Units
Contribution/No.of units	=(Exp. Selling Price - Variable Exp)
7,20,000/6,000	=(Exp. Selling Price - 80)
120	=(Exp. Selling Price - 80)
Exp Selling Price	=120+80
	=200

Sub Q 2

Contribution Margin Income statement as on 31.Dec.2018
No of Units Sold (N)	6,000.00
Expected Sales Price per unit (S)	200.00
Variable Exp per unit (V)	80.00
Contribution Per unit C = (S-V)	120.00
Total Contribution (T) = (C*N)	720,000.00
Total Fixed Cost (F)	300,000.00
Net Income (T-F)	420,000.00

Sub Q 3

Break Even Point in Units	=Fixed Expense/Contribution per unit
	=3,00,000/120
	=2500 Units
Break Even Point in Sales	=(Fixed Expense/Contribution per unit)*Expected Sales Price
	=3,00,000/120*200
	=5,00,000

Sub Q 4

No. Units sold in 2018	6,000.00
No. of units to be sold to reach break even	2,500.00
There fore no. of units decline in sales without putting company in loss	3,500.00
Sales Turnover in 2018	1,200,000.00
Sales req to reach break even	500,000.00
There fore decline in sales without putting company in loss	700,000.00