Question

Q10 Chloe Enterprises operates a single-product entity. Data relating to the product for 2015 were as follows. Annual volume Selling price per unit Variable manufacturing cost per unit Annual fixed manufacturing costs Variable marketing and distribution costs per unit Annual fixed non-manufacturing costs 32 000 units $60 $28 $120 000 $12 $360 000 Required: a. Calculate the break-even in both dollars and units for 2015. b. Calculate the margin of safety in both units and sales dollars. c. Calculate the profit achieved in 2015 given the annual volume of 32 000 units. d. Changes in marketing strategy are planned for 2016. This would increase variable marketing and distribution costs by $4 per unit, and reduce fixed non-manufacturing costs by 580 000 per year. Calculate the units that would need to be sold in 2016 to achieve the same profit as in 2015. e. Would you recommend the change? Explain.

Answer 1

Data Unit Sales Selling price per unit Variable Expenses per unit Fixed Expenses 32,000 units 60 per unit 40 per unit 4,80,000 $ Review Problem: CVP Relationships CM Ratio and VE Ratio Selling price per unit Variable Expenses per unit Contribution Margin per unit $ 60 per unit 40 per unit 20 per unit CM Ratio Variable Expense Ratio 33.33% 66.67%

$ S 2000 Compute the break-even Fixed Cost Contribution Margin per unit Break even units (FC/CM p.u.) Contribution Margin ratio Break even in sales (FC / CMR) 4,80,000 20.00 24000 units 33.33% 14,40,000 $ 32,000 24,000 8000 Margin of Safety In Units Actual Sales BE Sales MOS in Units In dollars of sales Sales Price per unit Actual Sales Break Even Sales MOS MOS Percentage MOS Actual Sales MOS Percentage $ $ $ $ 60 19,20,000 14,40,000 4,80,000 $ $ 4,80,000 19,20,000 25.00%

Unit Sales Selling price per unit Variable Expenses per unit Gross Profit Variable Marketing expenses Income before fixed expense Fixed Expenses for Manufacturing Fixed Expenses for Non Manufacturing Net Profit 32,000 60 $ 28 $ $ 12$ $ $ 19,20,000 8,96,000 10,24,000 3,84,000 6,40,000 1,20,000 3,60,000 1,60,000 _ $ $ Units required to earn the same profit as in 2016 Net Profit in 2015 Fixed Expenses Manufacturing Fixed Expenses on non-manufacturing A Desired Contribution B Total Variable cost p.u. in 2016 (after changes in mkting) C Sales price p.u. D Contribution p.u. in 2016 E Total units to be sold to earn desired contribution A/D) $ $ $ $ 1,60,000 1,20,000 2,80,000 5,60,000 44 60 16 35000

No, we will not advise choosing the new marketing plan as that would require us to sell a higher number of units in order to earn the same amount of profit as we earned in the year 2015.