Question

CVP analysis -what if questions. sales mix ozark metal co. makes a single product that sells for $42 per unit. variable cost $27.30 per unit and fixed costs total $65,415.

required:

a. calculate the number the number of units must be sold each month for the firm to break even

b assume current sales are $220,000. calculate the margin of safety and the margin of safety ratio

c. calculate opoerating income if 5,000 units are sold in a month

d calculate operating income if the selling price is raised to $45 per unit, advertising expendictures are increased by $8,000per month., and monthly units sales vlolume becomes 5,400 units.

d. assume that the firm adds another product to its product line and that the new product sell for $20 per unit , has variable costs of $14 per unit and causes fixed expenses in total to increase to 83,000 per month. calculate the firms operating income if 5,000units of the original product and 4,000 units of the new product are sold each month. for the original product , use the selling price and variable cost data given in the problem statement.

Answer 1

Answer to Question a and b:

Question a: Computation of Break-even point in units: Break even point = Total Fixed Costs/Contribution margin per unit Calculation of Contribution margin per unit Contribution margin per unit = Selling price per unit - Variable cost per unit Contribution margin per unit = $42 - $27.30 Contribution margin per unit = $14.70 Break even point: Break even point = $65,415/$14.70 Break even point = 4,450 units Question b: Calculation of break-even sales: Break-even sales = Break-even units X Selling price per unit Break-even sales = 4,450 X 42 Break-even sales = $186,900 Calculation of Margin of Safety and Margin of Safety Ratio Margin of Safety = Current sales - Break even sales Margin of Safety = $220,000 - $186,900 Margin of Safety = $33,100 Margin of safety ratio = ((Current sales - Break-even sales)/Current sales) X 100 Margin of safety ratio = ((220,000 - 186,900)/220,000) X 100 Margin of safety ratio = 15.05%

Answer to Question c, d, and e;

Question c: Calculation of Contribution margin: Contribution Margin = Number of units sold X Contribution margin per unit Contribution Margin = 5,000 X $14.70 Contribution Margin = $73,500 Calculation of Operating Income: Operating Income = Contribution margin - Fixed cost Operating Income = $73,500 - $65,415 Operating Income = $8,085 Question d: Calculation of Operating Income (5,400 units sold) Particulars Calculation Sales Revenue 243,000 (5,400 X $45) Less: Variable Costs $ 147,420 (5,400 X $27.30) Contribution Margin 95,580 (243,000 - 147,420) Less: Fixed Cost 73,415 (65,415 + 8,000) Operating Income $ 22,165 (95,580 - 73,415) Question e: Calculation of Operating Income (5,000 units of original product and 4,000 units of new product) Particulars Amount Calculation Sales Revenue $ 290,000 (5,000 X $42) + (4,000 X $20) Less: Variable Costs $ 192,500 (5,000 X $27.30) + (4,000 X $14) Contribution Margin $ 97,500 (290,000 - 192,500) Less: Fixed Cost $ 83,000 Operating Income $ 14,500 (97,500 - 83,000)