Question

(a) Determine the annual break-even point in sales dollars. Round contribution margin ratio to two decimal places for your calculation.

In the year 2013, Wiggins Processing Company had the following contribution income statement: WIGGINS PROCESSING COMPANY Contribution Income Statement For the Year 2013 $ 1,200,000 Sales Variable costs Cost of goods sold Selling and administrative Contribution margin $ 420,000 200,000 (620,000) 580,000 Fixed Costs 205,000 80,000 Factory overheard Selling and administrative Before-tax profit Income taxes (36%) After-tax profit (285,000) 295,000 (106,200) $ 188,800

(b) Determine the annual margin of safety in sales dollars. Use rounded answer from above for calculation.

(c) What is the break-even point in sales dollars if management makes a decision that increases fixed costs by $57,000?

Use rounded contribution margin ratio (2 decimal places) for your calculation.

(d) With the current cost structure, including fixed costs of $285,000, what dollar sales volume is required to provide an after-tax net income of $200,000?

Use rounded contribution margin (2 decimal places) for calculation. Round your answer to the nearest dollar.

(e) Prepare an abbreviated contribution income statement to verify that the solution to part (d) will provide the desired after-tax income.

Round your answers to the nearest dollar. Use rounded answers for subsequent calculations. Do not use negative signs with any of your answers.

All of the Parts need to be answered I tried them and only got part E partially correct.

Answer 1

Solution:

a.) Determine the annual break - even point in sales dollars:

Annual break even point = Fixed costs / Contribution margin ratio in sales dollars

Contribution margin ratio = Contribution margin / Sales

= $580,000 / $1,200,000 =0.48 or 48%

Break - even sales in dollars =$285,000/0.48

=$593,750

b.) Determine the amount margin of safety in sales dollars

Margin of safety = Current sales - Break even sales

Margin of safety =$1,200,000 - $593,750

=$606,250

c. ) What is the break - even point in sales dollars if management makes a decision that increases fixed cost by $57,000.

New fixed cost =$285,000+57,000 =$342,000

Break even sales = Fixed costs / Contribution margin ratio

=$342,000 / 0.48 = $712,500

d.) With the current cost structure, including fixed costs of $285,000 , what dollars sales required to provide an after tax net income of $200,000?

Income tax rate =36%

After - tax income = $200,000

Net income after tax = Desired profit after tax / (1- tax rate)

=$200,000/0.64 =$312,500

Sales required for desired profit = Fixed costs + Desired costs / Contribution margin ratio

= ($285000 + $312,500) / 0.48

=$597,500/0.48 =$1,244,791.66

$1,244,792

=

e.) Prepare an abbreviated contribution income statement to verify that the solutions to requirement (d) will provide the desired after- tax income.

Fixed costs	$285,000
Desired annual profit	$312,500
Contribution margin ratio	48%

Sales required for desired profit = Fixed costs + Desired costs / Contribution margin ratio

=(285,000 + $312,500) /0.48

=$597500/0.48 =$1,244,791.66

=$1,244,792

Wiggins Processing Company

Income Statement For the Year 2013

Sales	$1,244,792
Variable costs (52%)	$647,292
Contribution margin (48%)	$597,500
Fixed costs	$285,000
Net income before taxes	$312,500
Income tax (36%)	$112,500
Net income after taxes	$200,000

* variable costs = Sales - contribution margin

=(100% - 48%) =52%

Variable costs (52%) =$1,244,792 ×52%

=$647,291.84

=$647,292