Question

Solomon Corporation sells hammocks; variable costs are $58 each, and the hammocks are sold for $138 each. Solomon incurs $499,000 of fixed operating expenses annually. Required a1. Determine the sales volume in units and dollars required to attain a $77,000 profit. a2. Prepare an income statement using the contribution margin format. b. Solomon is considering implementing a quality improvement program. The program will require a $6 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plans to spend an additional $63,400 for advertising. Assuming that the improvement program will increase sales to a level that is 4,800 units above the amount computed in Requirement a, prepare a budgeted income statement using the contribution margin format. c. 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. Complete this question by entering your answers in the tabs below. Req A1 Req A2 Reg B Reqc 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. (Do not round intermediate calculations. Round your answers to nearest whole number. Round "Margin of safety" answer to 1 decimal place. (i.e., 0.234 should be entered as 23.4)) Break-even point in units Break-even point in sales dollars Margin of safety

Answer 1

Solution : a1.

Target profit = $ 77000

Fixed operating expenses = $ 499000

Contribution margin = $ 576000

Contribution margin per unit = selling price per unit - variable costs per unit

= $ 138 - $ 58 = $ 80 per unit

Sales volume (in units ) = Total contribution margin / contribution margin per unit

= $ 576000 / $ 80 = 7200 units

Sales volume ( in dollars) = 7200 units * $ 138 = $993600

1b. Income statement

	Amount	per unit
Sales ( 7200 units)	$ 993600	$ 138
Less : Variable Costs	$ 417600	$ 58
Contribution margin	$ 576000	$ 80
Less : Fixed costs	$ 499000
Net income	$ 77000

2.New variable costs per unit = $ 58 + $ 6 = $ 64 per unit

New fixed costs = $ 499000 + $ 63400 = $ 562400

New sales volume = 7200 units + 4800 units = 12000 units

	Amount	per unit
Sales ( 12000 units)	$ 165600	$ 138
Less : Variable Costs	$ 768000	$ 64
Contribution margin	$ 888000	$ 74
Less : Fixed costs	$ 562400
Net income	$ 325600

3. Break even point in units = Total fixed costs / Contribution margin per unit

= $ 562400 / $ 74 = 7600 units

Break even point in dollars = 7600 units * $ 138 per unit = $ 1048800

Margin of Safety = (Current Sales Level - Break Even Point )/ Current Sales Level *100

= ( 12000 units - 7600 units ) / 12000 units *100 = 36.67%