Question

3-35 Target income; CVP analysis (CMA adapted) (LO 2, 3) Kipmar Company produces a molded briefcase that is distributed to luggage stores. The following operating data for the current year has been accumulated for planning purposes. $ 40.00 12.00 10.60 3.00 Sales price Variable cost of goods sold Variable selling expenses Variable administrative expenses Annual fixed expenses Overhead T Selling expenses Administrative expenses $7,800,000 1,550,000 3,250,000 Kipmar can produce 1.5 million cases a year. The projected net income for the coming year is expected to be $1.8 million. Kipmar is subject to a 40% income tax rate. During the planning sessions, Kipmar's managers have been reviewing costs and expenses. They estimate that the company's variable cost of goods sold will increase 15% in the com- ing year and that fixed administrative expenses will increase by $150,000. All other costs and expenses are expected to remain the same. Required a. What amount of sales revenue will Kipmar need to achieve in the coming year to earn the projected net income of $1.8 million? b. What price would Kipmar need to charge for the briefcase in the coming year to maintain the current year's contribution margin ratio?

Answer 1

Sales required to achieve desired			=	(Revised Fixed Expense + Desired net income) / Cont. Margin ratio
profit
			=	($ 12750000 + $ 3000000)/32%
			=	$ 50,000,000.00

Workings:

			Current	Coming
			Year	Year
	Sales Price		$   40.00	$   40.00
Less:	Variable Costs
	COGS		$   12.00	$   13.80
	Selling expense		$   10.60	$   10.60
	Adm. Expense		$      3.00	$      3.00
	Contribution margin		$   14.40	$   12.60
	Cont. Margin ratio		36%	32%

Projected Net Income (after tax)			$ 1,800,000.00
Tax rate			40%
Projected Net Income (before tax)			$ 3,000,000.00	($ 1800000 x 100/60)

Revised fixed expenses
Overhead		$   7,800,000.00
Selling expenses		$   1,550,000.00
Adm. Expenses		$   3,400,000.00
		$ 12,750,000.00

Price to be charged
Cont. margin ratio =		Contribution margin / Sales
Let sales be x
Therefore, cont. margin ratio =			[x - ($ 13.8 + $ 10.6 + $ 3)] / x
	0.36	=	(x - $ 27.4)/x
	0.36x	=	x - $ 27.4
	0.64x	=	$      27.4
	x	=	$   42.81