Question

The Maxwell Company manufactures and sells a single product. Price and cost data regarding Maxwell's product and operations are as follows: Selling price per unit $25.00 Variable cost per unit Raw materials Direct Labor Manufacturing Overhead 11.00 5.00 2.50 Fixed Manufacturing Overhead $192,000 Annual Fixed Selling and Administration Variable Selling costs per unit sold $276,000 $1.30 Forecasted Annual Sales Volume (120,000 units) $3,000,000 Required: Show your calculations 1. Maxwell's breakeven point in units is? 2. Maxwell's breakeven point in dollars is? 3. How many units would Maxwell Company have to sell in order to earn $156,000 before taxes? 4. Maxwell Company estimates that its direct labor costs will increase 8 percent next year. How many units will Maxwell have to sell next year to reach breakeven point? 5. If Maxwell Company wants to earn $80,000 after taxes (tax rate is 20%), what is the number of units sold and the total sales (assume direct labor did increase by 8 percent)?

Answer 1

Ans.

1.

Total Variable cost per unit = $11 +$5 + $2.5 + $1.3 = 19.8

Selling price per unit =$ 25

Fixed Cost = $ 192,000 + $ 276,000 = $ 468,000

Contribution per unit = Selling price - Variable cost = $25 - $19.8 = $ 5.2

Break even point = Fixed Cost / Contribution per unit = $ 468,000/$ 5.2 = 90,000 units

2.

Contribution margin ratio = Contribution margin / Selling price = $ 5.2/$ 25 = 20.8%

Break even point in dollars = Fixed Cost / Contribution margin ratio = $ 468,000/ 20.8% = $ 2,250,000

3.

To earn $156,000 required units to be sold

Units sold = (Required Net Income) + Fixed Cost / Contribution per unit

=( $ 156,000 + $ 468,000) / $ 5.2 = $ 624,000/ $ 5.2 = 120,000 units

4.

If direct labor cost increase 8% then

Direct Labor = 5 + 8% = $5.4

Revised variable cost = 11 + 5.4 + 2.5 + 1.3 = $ 20.2

Revised contribution = 25 - 20.2 = $ 4.8

Revised Break even point = Fixed Cost / Contribution per unit = $ 468,000 / $ 4.8 = 97,500 units

5.

To earn $80,000 after taxes required units to be sold is calculated as

First calculate before taxes the required income is $ 80,000 + $ 20,000 = $ 100,000

Units sold = (Required Net Income) + Fixed Cost / Contribution per unit

=( $ 100,000 + $ 468,000) / $ 4.8 = $ 568,000/ $ 4.8= 118,333.33 units or 118,334 units