Question

Problem 18-06A Wildhorse Corporation has collected the following information after its first year of sales. Sales were $1,250,000 on 125,000 units, selling expenses $250,000 (40% variable and 60% fixed), direct materials $496,000, direct labor $34,900, administrative expenses $280,000 (20% variable and 80% fixed), and manufacturing overhead $358,000 (70% variable and 30% fixed). 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 year (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 & The company has a target net income of $202,000. What is the required sales in dollars for the company to meet its target? Sales dollars required for target net income a If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round answer to 1 decimal place, e.g. 10.5.) Margin of safety ratio

Answer 1

1)

Unit selling price :Total sales /unit sales

                          = 1250000/125000

                          = $ 10 per unit

	Variable cost	Fixed cost
Direct material	496000
Direct labor	34900
Selling expense	250000*40%= 100000	250000*60%= 150000
Administrative expense	280000*20%= 56000	280000*80%= 224000
Manufacturing overhead	358000*70%= 250600	107400
Total	937500	481400
number of units	125000
unit variable cost	937500/125000 =$ 7.5

Contribution for current year = units sales [price- variable cost]

                              = 125000 [10 -7.5]

                             = 125000 *2.5

                               = $ 312500

Expected unit sales next year = 125000 (1+.10) = 137500

Contribution margin for projected year =units sales [price- variable cost]

                              = 137500 [10 -7.5]

                             = 137500 *2.5

                            = 343750

Fixed cost :481400

2)

Breakeven point in units =Fixed cost /contribution per unit

                  = 481400 /2.5

                    = 192560 units

Breakeven point in dollars =Breakeven point in units * selling price

                           = 192560 *10

                           = $ 1925600

3)Contribution margin ratio =contribution /price

                    = 2.5/10 = .25 or 25%

Sales dollars to achieve target income =[Fixed cost+ target income ]/contribution margin ratio

                      = [481400+202000]/.25

                       = 683400/.25

                        = $ 2733600

4)

Margin of safety ratio = [Actual sales -Breakeven point sales ]/Actual sales

                 =[2733600- 1925600] /2733600

               = 808000/2733600

               = .296 or 29.6%