Question

Jay-Zee plans to sell 16,000 units at a price of $380 each.

Product costs include:

Direct materials $80.00

Direct labor $46.00 Variable overhead $11.00

Total fixed factory overhead $689,400

Variable selling expense is a commission of 3 percent of price;

fixed selling and administrative expenses total $99,400.

Required: 1. Calculate the sales commission per unit sold. If required, round your answers to the nearest dollar. Use rounded answers in subsequent computations.

$ per unit

Calculate the contribution margin

$per unit.

2. How many units must Jay-Zee Company sell to break even? Round your answer to the nearest whole number. units.

Prepare an income statement for the calculated number of units. If an amount is zero, enter "0". Do NOT round Break-even units and, if required, round your answer to the nearest dollar.

3. Calculate the number of units Jay-Zee Company must sell to achieve target operating income (profit) of $420,384. Round your answer to the nearest whole number. units

4. What if the Jay-Zee Company wanted to achieve a target operating income of $406,000? Would the number of units needed increase or decrease compared to your answer in Requirement 3? Round your answer to the nearest whole number.

Compute the number of units needed for the new target operating income. units PreviousNext

Answer 1

Requirement 1 Compute sales commission per unit as follows

            Sales commission        = Selling price × Commission rate

                                                = $380 × 3%

                                                = $11 per unit sold

Compute contribution margin per unit as follows:

Contribution margin per unit = Selling price per unit − Variable cost per unit

                                                = ($380 − ($80 + $46 + $11 + $11))

                                                = $232 per unit

Requirement 2: Compute break-even point in units as follows

Break-even point in units        = Total fixed costs ÷ Contribution margin per unit

                                                = ($689,400 + $99,400) ÷ $232 per unit

                                                = 3,400 units  

Prepare the following income statement:

Income Statement
Sales Revenue (3,400 × $380)		$1,292,000
Variable costs
Direct material (3,400 × $80)	$272,000
Direct labor (3,400 × $46)	$156,400
Variable overhead (3,400 × $11)	$37,400
Variable selling expenses (3,400 × $11)	$37,400
Total variable costs		$503,200
Contribution margin		$788,800
Total fixed costs		$788,800
Net income		$0

Requirement 3: Compute the number of units to be sold as follows

Number of units = (Total fixed costs + Target profit) ÷ Contribution margin per unit

                        = ($788,800 + $420,384) ÷ $232

                        = 5,212 units

Requirement 4: Compute the number of units to be sold as follows

Number of units = (Total fixed costs + Target profit) ÷ Contribution margin per unit

                        = ($788,800 + $406,000) ÷ $232

                        = 5,150 units

The number of units decreased by 62 (5,212 − 5,150) units when compared to the requirement 3.