Question

This year Burchard Company sold 35,000 units of its only product for $16.00 per unit. Manufacturing and selling the product required $120,000 of fixed manufacturing costs and $180,000 of fixed selling and administrative costs. Its per unit variable costs follow. Material Direct labor (paid on the basis of completed units) Variable overhead costs Variable selling and administrative costs $ 4.00 3.00 0.40 0.20 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 40,000 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. uired:

Answer 1

Plan 1 Plan 2 $16.00 $20.00 Per unit: sales Less: Variable costs : Materials Direct Labor Variable overhead costs Variable A & A costs To tal variable costs Contribution Margin $ 1.60 $ 1.80 $ 0.40 $ 0.20 $ 4.00 $ 12.00 $1.60 $ 1.80 $0.40 $0.20 $4.00 $16.00

Calculation: Plan 2: selling Price increase by 25% Sales per unit = ($ 16 + ($16 x 25%)] = $16 + $4 = $ 20 Plan 1 & Plan 2 : Material costs reduced by 60% Material = $ 4-($ 4 x 60%) - $4 - $2.4 = $16 Direct labor reduced by 40% Direct labor = $3-($3x40%) = $3-$1.2 = $1.8 Contribution Margin = (sales per Unit - Variable costs Per Unit) Plan 1: Contribution Margin = $16- $4 = $ 12 Plan 2. Contribution Margin = $20-$4 = $ 16

Plan 1 Contribution Margin Choose Numerator Contribution Margin Per Unit Ratio / Choose Denominator: 2 sales per Unit Contribution Margin Ratio Contribution Margin Ratio - $12.00 - $ 16.00 75% Break-even point in dollars Choose Numerator: Break-even point 1 Choose Denominator: = in dollars Total fixed costs 1 Contribution Break-even point Margin Ratio = in dollars $ 300,000 75.00% = $400,ooo Plan 2 I Contribution Margin Ratio Contribution Margin , sales per Unit - Contribution Per Unit Margin Ratio $ 16.00 / $20.00 80.00% Break-even point in dollars Contribution Total fixed costs / Margin Ratio = Break-even point $300,000 / do.00% = $375,000 in dollars oculation : Total fixed costs = (fixed manufacturing costs fixed s & A costs) Total fixed costs = $ 120,0.00 & $ 180,000 = $300,000