Question

C-V-PANALYSIS. Discussion Question Darin Musical Company manufactures and sells parts for musical gadgets. The business earned net income of s420,000 in 2018, when sales was 6,00o units and data for variable cost per unit and total fixed costs were as follows: Variable expenses per unit: Direct Material $20 Direct Labour $50 Variable Manufacturing Overhead Fixed Manufacturing Overhead Fixed Selling Costs Fixed Administrative Costs Fixed expenses: $125.000 S75.000 S100,000 Required: Compute the expected selling price per unit, using the equation method. 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 ii) iiCalculate Darin's break-even point in units and in sales dollars. iv) 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? v) 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 thex-axis and 2cm to represent s200,000 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 s5 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 io% in spite of an increase in total fixed costs of s87,000. What must the new selling price per unit be if the company wishes to meet the profit objective for 2019?

Answer 1

Solution of the above problem is as under:

i) Assume Selling Price per Unit be $ X

Income Statement
For the Year Ended December 31, 2018
Particulars	Working	Amount ($)
Sales (A)	6000 units*$X	6000X
Less: Variable Expenses
Direct Material Cost	6000 units*$20	120000
Direct Labour Cost	6000 units*$50	300000
Variable Manufacturing Overhead	6000 units*$10	60000
Total Variable Expenses (B)		480000
Contribution Margin [(A)-(B)] (C)		6000X-480000
Less: Fixed Expenses
Fixed Manufacturing Overhead		125000
Fixed Selling Costs		75000
Fixed Administrative Costs		100000
Total Fixed Expenses (D)		300000
Net Income [C-D]		420000
This implies, 6000X-480000-300000=420000
.i.e 6000X=1200000
Therefore, X=$200
Hence, Expected Selling Price per Unit = $200

ii)

Income Statement
For the Year Ended December 31, 2018
Particulars	Working	Amount ($)
Sales (A)	6000 units*$200	1200000
Less: Variable Expenses
Direct Material Cost	6000 units*$20	120000
Direct Labour Cost	6000 units*$50	300000
Variable Manufacturing Overhead	6000 units*$10	60000
Total Variable Expenses (B)		480000
Contribution Margin [(A)-(B)] (C)		720000
Less: Fixed Expenses
Fixed Manufacturing Overhead		125000
Fixed Selling Costs		75000
Fixed Administrative Costs		100000
Total Fixed Expenses (D)		300000
Net Income [C-D]		420000

iii) Calculation of Break-Even Point in Units and in Sales Dollar

Break-even Point (in Units) : Fixed Cost / Contribution Margin Per Unit

=300000/120

= 2500 Units

Contribution Margin per unit= Selling Price per Unit-Variable Price per Unit

=$(200-80)=$ 120

Break-even Point (in Dollars): Sales Price per Unit X Break-even Point (in units)

=$200*2500 Units

=$500000

iv) Due to Recession in the Economy in the Year 2019, Sales in Units declined by (6000-3900) Units= 2100 Units and Sale (in Dollars) Decline by $(1200000-780000)=$420000

Explanation of the above is:

Income Statement
For the Year Ended December 31, 2018
Particulars	Working	Amount ($)
Sales (A)	3900 units*$200	780000
Less: Variable Expenses
Direct Material Cost	6000 units*$20	120000
Direct Labour Cost	6000 units*$50	300000
Variable Manufacturing Overhead	6000 units*$10	60000
Total Variable Expenses (B)		480000
Contribution Margin [(A)-(B)] (C)		300000
Less: Fixed Expenses
Fixed Manufacturing Overhead		125000
Fixed Selling Costs		75000
Fixed Administrative Costs		100000
Total Fixed Expenses (D)		300000
Net Income [C-D]		0