Question

Waterways Problem 05 The Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company's profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them. Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 735,000 units at an average selling price of $3.60 per unit. The variable costs were $1,852,200, and the fixed costs were $508,032. What is the product's contribution margin ratio? (Round ratio to 0 decimal places, e.g. 25%.) Contribution margin ratio % LINK TO TEXT LINK TO TEXT LINK TO TEXT What is the company's break-even point in units and in dollars for this product? Break-even point in units units Break-even point in dollars LINK TO TEXT LINK TO TEXT LINK TO TEXT

Answer 1

1.Contribution Margin Ratio= (Sales- variable)*100/sales

(3.60-2.52)*100/3.60 = 30%

Variable cost per unit= Total variable cost/no of units sold

=1,852,200/735,000

=2.52 per unit

2.breakeven point in units = fixed cost/cm per unit

= 508,032/1.08

=470,400 units

breakeven point in dollars = fixed cost/cm ratio

= 508,032/30%

=$ 1,693,440

3. Margin of safety in dollars = Actual sales - Breakeven Sales

=2,646,000-1,693,440

=$ 952,560

Margin of Safety in ratio = Margin of safety*100/Sales

= $ 952,560*100/2,646,000

= 36%

4. Current Income= Sales- Varaible cost- Fixed expenses

= 2,646,000 - 1,852,200 - 508,032

=285,768

Increase in income by 10% so future income= $ 314,344.80

so units have to be sold = Profit + fixed cost/cm per unit

= 314,344.80+508,032/1.08

=761,460 units

waterways has to be sell( 761,460-735,000)26,460 additional units

5.sales increase by 53,000 units then total sales in units = 788,000 units

total contribution margin = 788,000*1.08= 851,040

income = contribution margin - fixed cost

= 851,040- 508,032

= 343,008

income increase in this product (343,008-285,768)

=$ 57,240

6.Contribution margin Statement

		total	per unit
sales (490,000 units)		12,838,000	26.20
variable expenses:
Manufacturing cost	6,929,740
Selling and administrative cost	2,698,760	9,628,500	19.65
contribution margin		3,209,500	6.55
Fixed cost:
Manufacturing cost	1,760,683
Selling and administrative cost	790,940	2,551,623
net income		657,877

		total	per unit
sales (539,000)		14,229,600	26.40
variable expenses:
total		10,968,650	20.35
contribution margin		3,260,950	6.05
Fixed cost:
Manufacturing cost	1,760,683
Selling and administrative cost	790,940	2,551,623
net income		709,327

	current	new	effect
contribution margin ratio	25%	23%	Decrease by	2%
net income	657,877	709,327	increase by	51,450

if sales price, not increase

		total	per unit
sales (539,000)		14,121,800	26.20
variable expenses:
total		10,968,650	20.35
contribution margin		3,153,150	5.85
Fixed cost:
Manufacturing cost	1,760,683
Selling and administrative cost	790,940	2,551,623
net income		601,527

contribution margin ratio = 5.85/26.20=22%

contribution margin decrease by 3%

profit Decrease by 657,877-601,527= 56,350