Question

Solomon Corporation sells hammocks; variable costs are $58 each, and the hammocks are sold for $138 each. Solomon incurs $499,000 of fixed operating expenses annually. Required a1. Determine the sales volume in units and dollars required to attain a $77,000 profit. a 2. Prepare an income statement using the contribution margin format. b. Solomon is considering implementing a quality improvement program. The program will require a $6 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plans to spend an additional $63,400 for advertising. Assuming that the improvement program will increase sales to a level that is 4,800 units above the amount computed in Requirement a, prepare a budgeted income statement using the contribution margin format. c. Determine the new break-even point in units and sales dollars as well as the margin of safety percentage, assuming that the quality improvement program is implemented. Complete this question by entering your answers in the tabs below. Req A1 Req A2 Reg B Reqc Solomon is considering implementing a quality improvement program. The program will require a $6 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plans to spend an additional $63,400 for advertising. Assuming that the improvement program will increase sales to a level that is 4,800 units above the amount computed in Requirement a, prepare a budgeted income statement using the contribution margin format. Show less SOLOMON CORPORATION Income Statement Sales Variable cost Contribution margin Fixed cost Net income

Answer 1

Solution :- a1.

Target profit = $ 77000

Fixed operating expenses = $ 499000

Contribution margin = Fixed expenses + Target profit

= $ 499000 + $ 77000 = $ 576000

Selling price per unit	$138
Less : Variable costs	$ 58
Contribution margin per unit	$ 80

Sales volume in units = Total contribution margin/ Contribution margin per unit

= $ 576000 / $ 80 = 7200 units

Sales volume in dollars = 7200 units * $ 138 per unit = $ 993600

a2. Income statement

	Amount	Per unit
Sales (7200 units)	$ 993600	$ 138
Less : Variable costs	$ 417600	$ 58
Contribution margin	$ 576000	$ 80
Less : Fixed Costs	$ 499000
Net income	$ 77000

b. New variable cost per unit = $58 + $6 = $ 64

New fixed expenses = $499000 + $ 63400 = $ 562400

New sales volume = 7200 units + 4800 units = 12000 units

Budgeted income statement

	Amount	Per unit
Sales (12000 units)	$ 1656000	$ 138
Less : Variable costs	$ 768000	$ 64
Contribution margin	$ 888000	$ 74
Less : Fixed Costs	$ 562400
Net income	$ 325600

c. Break Even ( In units ) = Total Fixed Costs / Contribution Margin per unit

= $ 562400 / $ 74 = 7600 units

Break Even ( in sales dollars ) = 7600 units * $ 138 per unit = $ 1048800

Margin of Safety = (Current Sales Level - Break Even Point )/ Current Sales Level *100

= ( 12000 units - 7600 units ) / 12000 units *100 = 36.67%