This year Burchard Company sold 27,000 units of its only product for $19.60 per unit. Manufacturing and selling the product required $112,000 of fixed manufacturing costs and $172,000 of fixed selling and administrative costs. Its per unit variable costs follow.
Material | $ | 3.20 | ||
Direct labor (paid on the basis of completed units) | 2.20 | |||
Variable overhead costs | 0.32 | |||
Variable selling and administrative costs | 0.12 | |||
Next year the company will use new material, which will reduce
material costs by 60% and direct labor costs by 40% and will not
affect product quality or marketability. Management is considering
an increase in the unit selling price to reduce the number of units
sold because the factory’s output is nearing its annual output
capacity of 32,000 units. Two plans are being considered. Under
plan 1, the company will keep the selling price at the current
level and sell the same volume as last year. This plan will
increase income because of the reduced costs from using the new
material. Under plan 2, the company will increase the selling price
by 25%. This plan will decrease unit sales volume by 10%. Under
both plans 1 and 2, the total fixed costs and the variable costs
per unit for overhead and for selling and administrative costs will
remain the same.
Please help with this 2 part question
Required:
1. Compute the break-even point in dollar sales
for both (a) plan 1 and (b) plan 2. (Round "per unit
answers" and "CM ratio" percentage answer to 2 decimal
places.)
2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (40% rate), and net income.
Solution 1:
Computation of Breakeven Point in dollar sales - Burchard Company | ||
Particulars | Plan A | Plan B |
Selling price per unit | $19.60 | $24.50 |
Variable cost per unit: | ||
Direct material ($3.20*40%) | $1.28 | $1.28 |
Direct labor ($2.20*60%) | $1.32 | $1.32 |
Variable overhead | $0.32 | $0.32 |
Variable selling and administrative cost | $0.12 | $0.12 |
Total variable cost per unit | $3.04 | $3.04 |
Contribution margin per unit | $16.56 | $21.46 |
Contribution margin ratio | 84.49% | 87.59% |
Fixed costs | $284,000 | $284,000 |
Breakeven sales (Fixed costs/ CM ratio) | $336,134 | $324,238 |
Solution 2:
Burchard Company | ||
Forecasted Contribution margin income statement | ||
Particulars | Plan 1 | Plan 2 |
Nos of units | 27000 | 24300 |
Sales | $529,200 | $595,350 |
Variable cost | $82,080 | $73,872 |
Contribution Margin | $447,120 | $521,478 |
Fixed Manufacturing Cost | $112,000 | $112,000 |
Fixed Selling & Administrative Cost | $172,000 | $172,000 |
Income before taxes | $163,120 | $237,478 |
Income Tax (40%) | $65,248 | $94,991 |
Net Income | $97,872 | $142,487 |
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