Question

Handout 2 ACCT 5140 - Cost Accounting Chapter 3 - Cost Volume Profit (CVP) Analysis Powell Company manufactures a product that it sells for $20 per unit. For 2020 the company expects to produce 30,000 units and sell 28.000 units. Variable manufacturing costs will be $8 per unit and variable selling expense $4 per unit. Total fixed manufacturing costs will be $120,000 and total fixed selling & administrative expense $60,000. The company's tax rate is 20%. Required: 1. Prepare a budgeted financial accounting income statement for 2020 2. Prepare a budgeted contribution income statement for 2020 3. Compute the company's unit contribution margin 4. Calculate the company's contribution margin (CM) ratio 5. Use the contribution margin method to calculate the company's breakeven point in (a) units and (b) dollars 6. Use the equation method to calculate the company's breakeven point in (a) units and (6) dollars 7. Calculate the number of units the company must sell to earn an operating income of $60,000 8. Compute the number of units the company must sell to earn a net income of $60,000 9. Assume that by using better quality inputs, the company's variable manufacturing cost will increase by $1 per unit. Fixed advertising costs will increase by $5,595 Selling price will also increase by 10% per unit. Calculate the number of units that must be sold to (a) breakeven (b) earn an after-tax profit of $60,000 10. Refer to the original information and calculate the margin of safety in (a) dollars. (b) percentage and (c) units 11. Refer to the original information and compute the company's operating leverage 12. Calculate the increase in operating income if sales increase by 10% 13. Prepare a new income statement that includes the 10% increase in sales

Answer 1

1. Income Statement

Income Statement
Particulars		Amount ($)
	Turnover	560000
Less	Variable overheads
	Manufacturing @ 8per unit	224000
	Selling and Admin @4 per unit	112000
	Contribution	224000
Less	Fixed Overheads
	Manufacturing	120000
	Selling and Admin	60000
	Profit	44000
	Tax Expense @20%	8800
	Net Income	35200

2. Contribution income statement

Contribution Statement
Particulars		Amount
Contribution		224000
Less	Fixed Overheads
	Manufacturing	120000
	Selling and Admin	60000
Profit		44000
	Tax Expense @20%	8800
Net Income		35200

3. Contribution Margin

Contribution Margin
Particulars		Amount
Contribution		224000
Total units produced		30000
Contribution per unit produced		7.467
Contribution		224000
Total units sold		28000
Contribution per unit sold		8