Question

Question 4

Belli-Pitt, Inc produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows:

Sales

$540,000

Less: Variable Expenses

360,000

Contribution Margin

$180,000

Less: Fixed Expenses

120,000

Operating Income

60,000

The company produced and sold 120,000 kilograms of product during the month. There were no beginning or ending inventories.

Required:

a)

Given the present situation, compute

1.

The break-even sales in kilograms.

2.

The break-even sales in dollars.

3.

The sales in kilograms that would be required to produce an after-tax operating income of $90,000 if the company s corporate income tax rate is 20%

4.

The margin of safety in dollars and in percentage terms.

5 The company current degree of operating leverage. If sales were to decrease by 15% by what percentage would net income decrease?What would be the company net income after this percentage decrease in net income

b)

An important part of processing is performed by a machine that is currently being leased for $20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease.

1.

Based on the current sales level should the company choose the lease or the royalty plan? Explain

2.

At what level of sales dollars would the company be indifferent between choosing the lease or royalty plan and resulting cost structure?Explain

3.

4.

Answer 1

	As per HOMEWORKLIB RULES we can solve only 4 parts of a question
	Annual Sales	1,20,000	Kilograms
	Sales price per unit	$4.50
	Variable cost per unit	$3.00
	Contribution margin per unit	$1.50
	Contribution margin	$1,80,000.00
	Fixed cost	$1,20,000.00
	Contribution margin ratio($1.50/$4.50)	33.33%
1	Breakeven point($120,000/$1.50)	80,000	Kilograms
2	Breakeven point in $($120,000/33.33%)	$3,60,000.00
3	After tax Operating income	$90,000.00
	Add:Taxes	$22,500.00
	Operating Income before tax	$1,12,500.00
	Add:Fixed cost	$1,20,000.00
	Required Contribution margin	$2,32,500.00
	Contribution margin per unit	$1.50
	Required sales in Kg($232,500/$1.50)	1,55,000	Kilograms
4	Margin of safety in $($540,000 - $360,000)	$1,80,000.00
	Margin of safety in %($1800,000/$540,000)	33.33%