Question

Problem 5-6A (Video) Cullumber Corporation has collected the following information after its first year of sales. Sales were $2,000,000 on 100,000 units, selling expenses $210,000 (40% variable and 60% fixed), direct materials $498,000, direct labor $600, 200, administrative expenses $280,000 (20% variable and 80% fixed), and manufacturing overhead $374,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year. Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.) (1) Contribution margin for current year Contribution margin for projected year (2) Fixed Costs Compute the break-even point in units and sales dollars for the current year. Break-even point in units units Break-even point in dollars The company has a target net income of $206,000. What is the required sales in dollars for the company to meet its target? Sales dollars required for target net income If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 10.5.) Margin of safety ratio

Answer 1

1) contribution margin

Particular	Current year	Projected year (10%increase)
Sale	2,000,000	2,200,000
Less: variable cost:
Direct material	498,000	547,800
Direct labour	600,200	660,220
Selling expense (40%)	84,000	92,400
Administrative expense (20%)	56,000	61,600
Manufacturing overhead (70%)	261,800	287,980
Contribution margin	500,000	550,000
Contribution margin %	25%	25%

Fixed cost

Selling expense (60%)	126,000
Administrative expense (80%)	224,000
Manufacturing overhead (30%)	112,200
Total fixed cost	462,200

Break even point in unit = fixed cost / contribution margin

= 462,200 / 5

= 92,440

Break even point in dollar = 92,440 x 20

= 1,848,800

Required sale = fixed cost + targeted income / contribution margin %

= 462,200 + 206,000 / 25%

= $2,672,800

Margin of safety ratio = Actual sale - break even sale / actual sale x 100

= 2,672,800 - 1,848,800 / 2,672,800 × 100

= 30.82%