Question

Problem 18-06A Sunland Corporation has collected the following information after its first year of sales. Sales were $1,300,000 on 130,000 units, selling expenses $210,000 (40% variable and 60% fixed), direct materials $494,000, direct labor $83,000, administrative expenses $282,000 (20% variable and 80% fixed), and manufacturing overhead $368,000 (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. t can 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 LINK TO VIDEO LNK то тEхT Compute the break-even point in units and sales dollars for the current year. Break-even point in units units Break-even point in dollars INK то техт шук то удрЕо The company has a target net income of $212,000. What is the required sales in dollars for the company to meet its target? Sales dollars required for target net income LINK TO VIDEO Ir the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 10.5.) Margin of safety ratio

Answer 1

Total variable cost:

Selling expense = $210,000 X 40% = $84,000

Direct material = $494,000

Direct labor = $83,000

Administrative expense = $282,000 X 20% = $56,400

Manufacturing overhead = $368,000 X 70% = $257,600

Total variable cost = $84,000 + $494,000 + $83,000 + $56,400 + $257,600 = $975,000

Total Fixed cost:

Selling expense = $210,000 X 60% = $126,000

Administrative expense = $282,000 X 80% = $225,600

Manufacturing overhead = $368,000 X 30% = $110,400

Total Fixed cost = $126,000 + $225,600 + $110,400 = $462,000

(1)

Contribution margin for current year = $1,300,000 - $975,000 = $325,000

Contribution margin for Projected year = ($1,300,000 - $975,000) + 10% = $357,500

(2)

Fixed costs = $462,000

Contribution margin per unit = $325,000 / $130,000 = $2.5

Breakeven point in units = $462,000 / $2.5 = 184,800 units

Breakeven point in dollars = $462,000 X $10 / $2.5 = $1,848,000

Sales dollar required for targeted income = [($462,000 + $212,000) / $2.5] X $10 = $2,696,000

Margin of safety ratio = ($2,696,000 - $1,848,000) / $2,696,000 = 31.5%