Question

Child's Play Company makes a plastic rattle for toddlers. The rattle is generally marketed through exclusive retailers located in upscale shopping malls. The company used 23 retailers. In late 2016, Diana Suares, the president of the company, was considering alternative marketing plans presented to her by Bill Dings, the marketing manager. Based on sales from January through October 2016, Diana expected that 2016 sales would amount to 300,000 units at $8.00 per unit. Diana Suares also had with her some cost data for 2016 supplied by the CFO, Don Capp. Don expects that these costs are reliable estimates for a volume up to 400,000 units. Beyond 400,000 units, the company would have to rent additional machines (with a capacity of 100,000 units each) at an annual cost of $50,000 per machine in 2016). The data are presented in Exhibit A. Total fixed manufacturing and selling and administrative costs are each expected to increase in 2017 by 10 percent because of inflation. Variable costs per unit and the selling price would stay the same as in 2016. Exhibit A (2016 Cost Data) Manufacturing costs for rattles (based on production volume of 300,000 units). $0.80 per unit * $10 per hour * Direct material Direct labor (Each worker can make 20 units in an hour) Packaging Power, supplies, indirect labor, and other variable production costs Supervisory salaries, equipment rental, and miscellaneous production costs $0.75 per unit * $1.20 per unit * $1.80 per unit * These costs vary in total with production volume Selling and administrative costs (based on sales volume of 300,000 units). Commissions to sales staff Shipping Advertising and promotion Administrative staff salaries, depreciation on office equipment, etc 10% of price to retailer ** $0.50 per unit ** $0.60 per unit $0.90 per unit ** These costs vary in total with sales volume.

18. What is the profit at 100,000 units above break even?

19. What is the margin of safety at 1000 units above break even?

20. What is the sales volume required to give $100,000 profit before tax?

21. What is the sales volume required to give $180,000 after tax, assuming a tax rate of 40%?

Answer 1

Break-even volume of sales= Fixed costs/Contribution per unit
So, we will find the fixed costs, first
Mfg. costs:
Supervisory salaries, eqpt. Rentals & misc. prodn.costs(300000*1.8)		540000
Sell. & Admn. Costs:
Advertising & promotion (300000*0.60)		180000
Admn. Staff salaries, depn. On office eqpt., etc.(300000*0.90)		270000
Total fixed costs		990000
Selling price/unit		8
Variable costs /unit
Mfg. costs:
Direct material	0.8
Direct labor($ 10/20 units)	0.5
Packaging	0.75
Power,supplies,etc.	1.2
Sales commission($ 8*10%)	0.8
Shipping	0.5
Total Variable costs/unit		4.55
Contribution /unit(8-4.55)		3.45
So, Break-even sales volume=
990000/3.45=		286956.52

18. Now, anwering this question

profit at 100000 units above break-even

100000*(8-4.55)=

345000

19.Margin of safety at 1000 units above break even

units above BEP* selling price/unit

ie. 1000*8

8000

Or,

Actual sales-Break-even sales

(287956.52*8)-(286956.52*8)=

8000

20.Sales volume required to give $100,000 profit before tax

(Fixed costs+Target Before-tax profit)/Contribution per unit

ie.(990000+100000)/3.45=

315942.03

21.Sales volume required to give $180,000 after tax, assuming a tax rate of 40%

After-tax profit of 180000 means,

before tax profit of 180000/60*100= 300000

Now, proceeding as in 20. above,

(Fixed costs+Target before-tax profit)/Contribution per unit

ie.(990000+300000)/3.45=

373913.04