Question

Zachary Corporation sells hammocks; variable costs are $70 each, and the hammocks are sold for $132 each. Zachary incurs $294,000 of fixed operating expenses annually.

Required

1. Determine the sales volume in units and dollars required to attain a $78,000 profit. Prepare an income statement using the contribution margin format.

2. Zachary is considering implementing a quality improvement program. The program will require a $8 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plans to spend an additional $51,600 for advertising. Assuming that the improvement program will increase sales to a level that is 5,700 units above the amount computed in Requirement a, prepare a budgeted income statement using the contribution margin format.

3. Determine the new break-even point in units and sales dollars as well as the margin of safety percentage, assuming that the quality improvement program is implemented.

Required A1Required A2 Required B Required C Determine the sales volume in units and dollars required to attai Sales volume in units Sales volume in dollars

Answer 1

Answer a.

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $132 - $70
Contribution Margin per unit = $62

Required Sales in units = (Fixed Costs + Target Profit) / Contribution Margin per unit
Required Sales in units = ($294,000 + $78,000) / $62
Required Sales in units = 6,000

Required Sales in dollars = Required Sales in units * Selling Price per unit
Required Sales in dollars = 6,000 * $132
Required Sales in dollars = $792,000

ZACHARY CORPORATION Income Statement Sales Less: Variable Costs Contribution Margin Less: Fixed Costs Net Operating Income 792000 420000 372000 294000 78000

Answer b.

Variable Cost per unit = $70 + $8
Variable Cost per unit = $78

Fixed Costs = $294,000 + $51,600
Fixed Costs = $345,600

Sales Volume = 5,700 + 6,000
Sales Volume = 11,700 units

Answer c.

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $132 - $78
Contribution Margin per unit = $54

Breakeven Point in units = Fixed Costs / Contribution Margin per unit
Breakeven Point in units = $345,600 / $54
Breakeven Point in units = 6,400

Breakeven Point in dollars = Breakeven Point in units * Selling Price per unit
Breakeven Point in dollars = 6,400 * $132
Breakeven Point in dollars = $844,800

Margin of Safety in percentage = (Sales - Breakeven Point in dollars) / Sales
Margin of Safety in percentage = ($1,544,400 - $844,800) / $1,544,400
Margin of Safety in percentage = 0.453 or 45.3%