Question

Monterey Co. makes and sells a single product. The current selling price is $15 per unit. Variable expenses are $9 per unit, and fixed expenses total $31,900 per month. (Unless otherwise stated, consider each requirement separately.)

a. Calculate the break-even point expressed in terms of total sales dollars and sales volume. (Do not round intermediate calculations.)

break even sales =

break even volume = units

b. Calculate the margin of safety and the margin of safety ratio. Assume current sales are $94,750. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.)

Margin of safety =

Margin of safety of ratio = %

c. Calculate the monthly operating income (or loss) at a sales volume of 5,150 units per month. (Do not round intermediate calculations.)

d. Calculate monthly operating income (or loss) if a $2 per unit reduction in selling price results in a volume increase to 8,300 units per month. (Do not round intermediate calculations.)

e. What questions would have to be answered about the cost-volume-profit analysis simplifying assumptions before adopting the price cut strategy of part d? (Select all that apply.)

Does the increase in volume move fixed expenses into a new relevant range?

Does the increase in volume move variable expenses into a new relevant range?

Are variable expenses really linear?

Are fixed expenses really linear?

f. Calculate the monthly operating income (or loss) that would result from a $1 per unit price increase and a $6,000 per month increase in advertising expenses, both relative to the original data. Assume a sales volume of 5,150 units per month. (Do not round intermediate calculations.)

Management is considering a change in the sales force compensation plan. Currently each of the firm's two salespeople is paid a salary of $2,500 per month.

g-1. Calculate the monthly operating income (or loss) that would result from changing the compensation plan to a salary of $400 per month, plus a commission of $0.75 per unit, assuming a sales volume of 5,150 units per month. (Do not round intermediate calculations.)

g-2. Calculate the monthly operating income (or loss) that would result from changing the compensation plan to a salary of $400 per month, plus a commission of $0.75 per unit, assuming a sales volume of 6,350 units per month. (Do not round intermediate calculations. Losses should be indicated by a minus sign.)

h-1. Assuming that the sales volume of 6,350 units per month achieved in part g could also be achieved by increasing advertising by $1,000 per month instead of changing the sales force compensation plan. What would be the operating income or loss? (Do not round intermediate calculations. Losses should be indicated by a minus sign.)

Answer 1

SOLUTION

a. Contribution margin = Sales price - Variable costs

= $15 - $9= $6

Contribution margin ratio = Contribution margin / Sales price

= $6 / $15 = 40%

Break even point = Fixed expenses / Contribution margin

= $31,900 / $6 = 5,317 units

Break even sales = Fixed expenses / Contribution margin ratio

= $31,900 / 40% = $79,750

b. Margin of safety = Actual sales - Break even sales

= $94,750 - $79,750 = $15,000

Margin of safety ratio = (Actual sales - Break even sales) / Actual sales

= ($94,750 - $79,750) / $94,750

= 15.83%

c.

Sales (5,150*$15)	77,250
Less: Variable costs (5,150*$9)	46,350
Contribution margin	30,900
Less: Fixed costs	31,900
Net operating income	(1,000)

d.

Sales (8,300*$13)	107,900
Less: Variable costs (8,300*$9)	74,700
Contribution margin	33,200
Less: Fixed costs	31,900
Net operating income	1,300

** As per HOMEWORKLIB RULES, I have answered first 4 sub parts