Question

3 Information: 5 Number of Units Produced 6 Number of units Sold 3200 3200 $48 per unit $26 per unit Cost of Goods Sold Detail: Direct materials Direct Labor Manufacturing Overhead: Rent on Factory Building Depreciation on Equipment Other Expen Salaries for Rent of Offic Depreciation Commission 8 Revenue per unit $275 per unit $25,000 total 10 12 A) Traditional Absorption Costing Income Statement B) Contribution Margin Income Statement income Statement using Variable Costing) Calculate Total variable Total fixed cc Income Statement (GAAP Format) Income Statement Contribution Margin Format e Contribution Breakeven pc Breakeven pc 17 Sales Revenue 18 Cost of Goods Sold 19 Gross Margin 20 Operating Expenses 21 Net Income Sales Revenue Variable Costs Contribution Martin Fixed Costs Margin of Saf Margin of Saf Margin of Saf Net Income 02 Degree or Magnitude of Operating Leverage Hofunits tha 1c) Using a formulato answer this question, determine the company's NET INCOME if the number of units produced and sold increases by 20% The minimur must be sett Net Income at 20% higher level of prod/sales

Answer 1

Solution

1. Traditional Absorption Costing Income Statement:

Traditional Absorption Costing Income Statement
(GAAP Format)
Sales Revenue	$880,000
Cost of Goods Sold	$289,800
Gross Margin	$590,200
Operating Expenses	$117,600
Net Income	$472,600

Computations:

Sales revenue = $275 x 3,200 = $880,000

Cost of goods sold –

Variable (DM + DL) = ($48 + $26) x 3,200 = 236,800

Fixed MOH – (rent + depreciation) = 25,000 + 28,000 = $53,000

Total Cost of Goods Sold = 289,800

Operating Expenses -
fixed –

Salaries                 $58,000

Rent                      $22,500

Depreciation         $11,500

Commission         $8 x 3,200 = $25,600

Total operating expenses = $117,600

B. Contribution Margin Income Statement:

Income Statement
Contribution Margin Format
Sales Revenue		$880,000
Variable Costs		$262,400
Contribution Margin		$617,600
Fixed Costs		$145,000
Net Income		$472,600
Degree or magnitude of operating leverage:	contribution margin/net income	617,600/472,600	1.31

Computations:

Variable costs –

Direct materials = $48 per unit

Direct labor = $26 per unit

Commission = $8 per unit

Total variable cost = $82 per unit

Total variable cost = $82 x 3,200 = $262,400

Total fixed costs –

Manufacturing overhead –

Rent = $25,000

Depreciation = $28,000

Operating costs –

Salaries = $58,000

Rent = $22,500

Depreciation = $11,500

Total fixed cost = $145,000

C. Calculation of the following using formulas:

Total Variable Cost per Unit		$82	(262,400/3,200)
Total Fixed Cost		$145,000
Contribution Margin per Unit		$193	(617,600/3,200)
Break-even point in units		751 units	(145,000/193)
Breakeven point in sales dollars		$206,606	(145,000/70.2%)
Margin of safety in units		2,449	(3,200 - 751)
Margin of safety in dollars		$673,394	(880,000 - 206,606)
Margin of safety as a percentage of current sales		76.50%	(673,394/880,0000
Number of units that must be sold to earn $350,000		2,564	(145,000 + 350,000)/$193
The minimum selling price per unit that must be set to earn		$189.80	(262,400 + 145,000 + 200,000)/3,200

Computations:

Break-even point in units = fixed cost/contribution margin per unit

Break-even point in dollars = fixed cost/contribution margin ratio

Contribution margin ratio = unit contribution margin/unit selling price

= 193/275 = 70.2%

Margin of safety in units = actual sales units – bep sales unit

Margin of safety in dollars = actual sales – BEP sales

Margin of safety as a percent = margin of safety sales/actual sales

Number of units that must be sold to earn $350,000 profit = (fixed cost + target income)/unit contribution margin

Minimum selling price to earn $200,000 = (total costs + target income)/unit sales

3,200 x S = (262,400 +145,000 + 200,000) =$189.80