Question

Problem 18-06A Oriole Corporation has collected the following information after its first year of sales. Sales were $1,600,000 on 100,000 units, selling expenses $250,000 (40% variable and 60% fixed), direct materials $510,000, direct labor $288,200, administrative expenses $284,000 (20% variable and 80% fixed), and manufacturing overhead $350,000 (70% variable and 30% fixed). Top management h xed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year. Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.) (1) Contribution margin for current year Contribution margin for projected yeart (2) Fixed Costs Compute the break-even point in units and sales dollars for the current year. Break-even point in units units Break-even point in dollars t

Answer 1

Current year

Variable costs = 250,000*40%+510,000+288200+284000*20%+350000*70%

=$1,200,000

Fixed costs = 250000*60%+284000*80%+350000*30%

=$482,200

Contribution margin = sales revenue - variable costs

Current year = 1600,000 - 1200,000

=$400,000

Projected year=400,000+400,000*10%

=$440,000

Fixed costs =$482,200

Break even units = fixed costs/contribution margin per unit

=482200/4

= 120,550 units

In dollars = 120550*16 =$1,928,800

CM ratio = 25%

Required sales =(required profit + fixed costs)/contribution margin ratio

= (204000+482200)/25%

=$2,744,800

Margin of safety ratio = (sales - break even sales)/sales

=(2744800-1928800)/2744800

= 29.7289%

I.e. 29.7%