Question

Units Sold to Break Even, Unit Variable Cost, Unit Manufacturing Cost, Units to Earn Target Income Werner Company produces and sells disposable foil baking pans to retailers for $3.00 per pan. The variable cost per pan is as follows: Direct materials $0.31 Direct labor Variable factory overhead 0.55 0.70 0.17 Variable selling expense Fixed manufacturing cost totals $250,789 per year. Administrative cost (all fixed) totals $34,199. Required: 1. Compute the number of pans that must be sold for Werner to break even X pans 2. Conceptual Connection: What is the unit variable cost? What is the unit variable manufacturing cost? Round your answers to the nearest cent. Unit variable cost Unit variable manufacturing cost Which is used in cost-volume-profit analysis? 3. How many pans must be sold for Werner to earn operating income of 512,7007 pans 4. How much sales revenue must Werner have to earn operating income of 512,700? Check My Work Previous All work saved. Email Instructor Save and Exit Submit Assignme MacBook Pro

Answer 1

(1) First we will calculate the variable cost per unit:

Variable cost = Direct material + Direct labor + Variable factory overhead + Variable selling expense

Variable cost per unit = $0.31 + $0.55 + $0.70 + $0.17 = $1.73

Next we will calculate the total fixed costs:

Total fixed costs = Fixed manufacturing cost + Administrative cost

Total fixed cost = $250789 + $34199 = $284988

Next, we will calculate the contribution margin per unit as per below

Contribution margin per unit = Selling price per unit - Variable cost per unit

Contribution margin per unit = $3 - $1.73 = $1.27 per unit

Now, Break even level of pens will be calculated by the following formula:

Break even pens = Fixed cost / Contribution margin per unit

Putting the values in the above formula, we get,

Break even pens = $284988 / $1.27 = 224400

So, in order to break even, 224400 pens must be sold.

(2) Unit variable cost = $1.73 (as calculated in point (1) above)

Unit variable manufacturing cost = Unit variable cost - Variable selling expense

Unit variable manufacturing cost = $1.73 - $0.17 = $1.56

In cost volume profit analysis, Unit variable cost is used.

(3) For earning operating income of $12700:

Number of pens required to earn $12700 operating income = Fixed cost + $12700 / Contribution margin per unit

given: Fixed costs = $284988 (as computed in point (1) above), Contribution margin per unit = $1.27 (as calculated in point (1) above)

Putting the values in the above formula, we get,

Number of pens required to earn $12700 operating income = $284988 + $12700 / $1.27

Number of pens required to earn $12700 operating income = $297688 / $1.27 = 234400

(4) For calculating the sales revenue, we need to calculate the contribution margin ratio as per below:

Contribution margin ratio = Contribution margin per unit / Selling price per unit

where, Contribution margin per unit = $1.27 (as calculated in point (1)) and selling price per unit = $3

Putting the values in the above formula, we get,

Contribution margin ratio = $1.27 / $3 = 0.42333

Now,

Sales revenue required to earn $12700 operating income = Fixed cost + $12700 / Contribution margin ratio

given: Fixed costs = $284988 (as computed in point (1) above), Contribution margin ratio = 0.4233 (as computed above)

Putting the values in the above formula, we get,

Sales revenue required to earn $12700 operating income = $284988 + $12700 / 0.42333

Sales revenue required to earn $12700 operating income = $297688 / 0.42333 = 703200