Question

Lorge Corporation has collected the following information after its first year of sales. Sales were $2,400,000 on 120,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $1,206,700; direct labor $280,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $399,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year. Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.) (1) Contribution margin for current year $ Contribution margin for projected year $ (2) Fixed costs for current year 4 e Textbook and Media Compute the break-even point in units and sales dollars for the first year. (Round contribution margin ratio to 2 decimal places e.g. 0.15 and final answers to 0 decimal places, e.g. 2,510.) Break-even point units Break-even point $ e Textbook and Media

Answer 1

Question - (1)

Following calculations are needed before answering the given question

	Current Year	Projected Year
Sales	2400000	2640000
(-) Variable cost
Selling expenses	100000	110000
Direct materials	1206700	1327370
Direct labor	280000	308000
Administrative	54000	59400
Manufacturing OH	279300	307230
Total variable	1920000	2112000
Fixed cost
Selling exp 60%	150000	150000
Administrative 80%	216000	216000
Manufacturing 30%	119700	119700
Total fixed cost	485700	485700

Variable expenses are taken with given percentages. For example Selling expenses = 250,000 *  0.40 = 100,000

Projected year values are obtained ........... by multiplying sales and variable costs with 1.10. Because there is 10% increase in unit sales.

(1) Contribution margin current year = Sales - Total variable cost = 2400,000 - 1920,000 = 480,000

..... Contribution margin projected year = 2640,000 - 2112,000 = 528,000

(2) Fixed cost for current year = 485700

Break even point in Units and dollars

BEP in Units = Fixed cost / Contribution margin per Unit = 485700 / 4 = 121,425

Contribution margin per unit = 480,000 / 120,000 Units = 4 per Unit

BEP in dollars = Fixed cost / Contribution margin ratio = 485700 / 0.20 = $2,428,500

Contribution margin ratio = Contribution margin / Sales * 100 = 480,000 / 2400,000 * 100 = 20%

Sales to target profit

Sales ( in dollars ) required = ( Fixed cost + desired profit ) / Contribution margin ratio

= ( 485700 + 160,000 ) / 0.20

= 3,228,500

Margin of safety = Target profit / Contribution margin ratio = 160,000 / 0.20 = 800,000

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

= 800,000 / 2400,000 * 100

= 33.33 %

Question - (2)

Sales	2400000
(-) Variable cost
Selling expenses	225000
Direct materials	1206700
Direct labor	180000
Administrative	54000
Manufacturing OH	119700
Total variable	1785400
Contribution margin	614600
Contribution margin ratio	25.61 %

Break even point = Fixed cost / Contribution margin ratio

= 520300 / 0.2561 = $ 2,031,628

Fixed cost
Selling exp 10%	25000
Administrative 80%	216000
Manufacturing 30%	279300
Total fixed cost	520300