Question

ICP 3 Bundy Corp. manufactures luxury toys for specialty toy stores. For the year just ended, Bundy had sales of 900 units and had the following operating results: Bundy Corp. Variable costing income statement For the year ended December 31 $1,800,000 Sales Variable costs: Manufacturing Selling and administrative 630,000 360,000 990,000 Contribution margin 810,000 Fixed costs: Manufacturing Selling Administrative 180,000 225,000 90.000 495,000 Operating income Income taxes (40%) 315,000 126,000 Net income $ 189,000 Bundy has a capacity of 1,500 units. Required: (Note: Answer each question based on the original data.) a) What is the break-even point in units for Bundy? b) Bundy predicts sales of 1,050 units next year. If prices and costs remain consistent, what will after-tax net income be? c) Bundy is planning to expand its product line to another province and estimates that marketing in this new location will cost the company an additional $123,000 for each of the next three years. Bundy also expects to pay a $50 per unit commission to the salespeople in this new location. Assuming all other costs remain the same, how many units would need to be sold in the new location to maintain Bundy's after-tax net income of $189,000? **CPA SE PREP 7/14 Intermediate Management Accounting Lesson 1 -In-Class Problems d) Bundy is considering replacing its manual process with an automated process. This would increase fixed manufacturing costs by $117,000, while variable manufacturing costs would decrease by $50 per unit. What would the new break-even sales level in units be in this situation? e) Bundy estimates that the selling price for products will decrease by 10% this year, while variable costs would increase by $80 per unit and fixed costs would remain the same. What sales volume in dollars would be required to maintain the current after-tax net income of $189,000?

Answer 1

a)contribution per unit =Total contribution /number of units

                       = 810000 /900

                        = $ 900 per unit

Breakeven point (units) =Fixed cost /contribution per unit

                     = 495000 / 900

                      = 550 units

b)

Contribution (900*1050)	945000
less:Fixed cost	-495000
Operating income	450000
less:Tax expense (450000*40%)	(180000)
After tax profit	270000

c)

Increase in sales commission per unit (increase in variable cost )will result in decrease in contribution margin per unit = 900 - 50 =$ 850 per unit

Revised fixed cost = 495000 + 123000= 618000

Before tax profit = after tax profit /(1-t-ax rate)

                     = 189000/(1-.40)

                    = 315000

Desired units to be sold = [Before tax profit + Revised fixed cost ]/contribution per unit

               = [315000 +618000]/850

               = 933000/850

               = 1098 units

d)

Decrease in variable cost will result in Increase in contribution margin per unit = 900+ 50 =$ 950 per unit

Revised fixed cost = 495000 + 117000 = 612000

Breakeven point = fixed cost /Contribution per unit

              = 612000/ 950

               = 644.21 (rounded to 644 units or 645 if needs to be rounded to next of decimal place)

e)Current selling price = 1800000/900=2000 per unit

revised selling price = 2000(1-.10 )= 1800

Variable cost per unit= 990000/900= 1100

Revised variable cost per unit = 1100+80 = 1180

Revised contribution per unit = 1800-1180= 620

Contribution margin ratio =Revised contribution per unit /revised selling price

          = 620 /1800

              = .34444

Dollar sales required to achieve desired profit =[Before tax profit +fixed cost ]/CM ratio

                = [315000+495000]/.34444

                 = 810000/.34444

                 = $ 2351643.25    (rounded to 2351643)