Question

This year Bertrand Company sold 40,000 units of its only product for $25 per unit. Manufacturing and selling the product required $200,000 of fixed manufacturing costs and $325,000 of fixed selling and administrative costs. Its per unit variable costs follow. tion $8.00 5.00 Material Direct labor (pald on the basis of completed units) Variable overhead costs, Variable selling and administrative costs 1.00 10.50 Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 60% and will not affect product quality or marketability. Management is considering an in- crease in the unit sales price to reduce the number of units sold because the factory's output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will in- crease price by 20%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same. Required 1. Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2. 2. Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution mar- gin, total fixed costs, income before taxes, income taxes (30% rate), and net income.

Answer 1

Updated answer

working for contribution per unit calculation Current Plan 1 Plan 2 $25.00 $25.00 $30.00 Sale Direct Material Direct Labor Variable Manufacturing Overheads Variable Selling Overheads Total Variable Cost $8.00 $5.00 $1.00 $0.500 $14.50 $4.00 $2.00 $1.00 $0.50 $7.50 $4.00 $2.00 $1.00 $0.50 $7.50 Contribution 10.5 $17.50 $22.50 1/BEP (Fixed Cost / Contribution Per Unit) Current Plan 1 Plan 2 Total Fixed Cost $525,000.00 $525,000.00 $525,000.00 Contribution Per Unit $10.50 $17.50 $22.50 BEP In Units 50000 30000 23333.3333 Sale Price $25.00 $25.00 $30.00 BEP in Dollar Sales $1,250,000.00 $750,000.00 $700,000.00

2 Sale Units 40000 40000 36000 Current Paln 1 Plan 2 Total Per Unit Total Per Unit Total $25.00 $1,000,000.00 $25.00 $1,000,000.00 $30.00 $1,080,000.00 Sale Direct Material Direct Labor Variable Manufacturing Overheads Variable Selling Overheads Total Variable Cost $8.00 $5.00 $1.00 $0.50 $14.50 $320,000.00 $200,000.00 $40,000.00 $20,000.00 $580,000.00 $4.00 $2.00 $1.00 $0.50 $7.50 $160,000.00 $80,000.00 $40,000.00 $20,000.00 $300,000.00 $4.00 $2.00 $1.00 $0.50 $7.50 $144,000.00 $72,000.00 $36,000.00 $18,000.00 $270,000.00 Contribution $10.50 $420,000.00 $17.50 $700,000.00 $22.50 $810,000.00 Fixed Costs: Manufacturing Selling and Administrative Total Fixed Costs Income Before tax Less: Income Tax 30% Net Income $200,000.00 $325,000.00 $525,000.00 -$105,000.00 -$31,500.00 -$73,500.00 $200,000.00 $325,000.00 $525,000.00 $175,000.00 $52,500.00 $122,500.00 $200,000.00 $325,000.00 $525,000.00 $285,000.00 $85,500.00 $199,500.00

Sale Units 40000 40000 36000 Current Paln 1 Plan 2 Per Unit Total Per Unit Total Per Unit Total 25 1000000 25 1000000 30 1080000 Sale Direct Material Direct Labor Variable Manufacturing Overheads Variable Selling Overheads Total Variable Cost 8 320000 5 200000 1 40000 0.5 20000 14.5 580000 4 1600001 2 80000 11 40000 0.5 20000 7.5| 300000 4 144000 2 72000 1 36000 0.5 18000 7.5 270000 Contribution 10.5| 420000 17.5 700000 22.5 810000 Fixed Costs: Manufacturing Selling and Administrative Total Fixed Costs Income Before tax Less: Income Tax 30% Net Income 200000 325000 525000 - 105000 -31500 -73500 200000 325000 525000 175000 52500 122500 200000 325000 525000 285000 85500 199500 BEP (Fixed Cost / Contribution Per Unit) *Sale Price Total Fixed Cost Contribution Per Unit BEP In Units Sale Price BEP in Dollar Sales Current Plan 1 Plan 2 525000 525000 525000 10.5 17.5 22.5 50000 30000 23333.33333 25 1250000 750000 700000

Sale Units 40000 40000 36000 Current Paln 1 Plan 2 Per Unit Total Per Unit Total Per Unit Total 25 1000000 25 1000000 30 1080000 Sale Direct Material Direct Labor Variable Manufacturing Overheads Variable Selling Overheads Total Variable Cost 8 320000 5 200000 1 40000 0.5 20000 14.5 580000 4 1600001 2 80000 11 40000 0.5 20000 7.5| 300000 4 144000 2 72000 1 36000 0.5 18000 7.5 270000 Contribution 10.5| 420000 17.5 700000 22.5 810000 Fixed Costs: Manufacturing Selling and Administrative Total Fixed Costs Income Before tax Less: Income Tax 30% Net Income 200000 325000 525000 - 105000 -31500 -73500 200000 325000 525000 175000 52500 122500 200000 325000 525000 285000 85500 199500 BEP (Fixed Cost / Contribution Per Unit) *Sale Price Total Fixed Cost Contribution Per Unit BEP In Units Sale Price BEP in Dollar Sales Current Plan 1 Plan 2 525000 525000 525000 10.5 17.5 22.5 50000 30000 23333.33333 25 1250000 750000 700000