Question

Total Revenue Profit Total Cost CVP Analysis Variable Cout Fed Cost Units Sold In Class Example Ritchie Manufacturing Company makes a product that it sells for $150 per unit. The company incurs variable manufacturing costs of $60 per unit. Variable selling expenses are $18 per unit, annual fixed manufacturing costs are $480,000, and fixed selling and administrative costs are $240,000 per year. (1) Calculate the breakeven point in units and sales dollars. (2) Prepare a contribution margin income statement to support your results. (3) Calculate the number of units and sales revenue required to earn profit of $75,000. (4) What is the margin of safety between the company earning a $75,000 profit and (5) What would happen to the breakeven point if variable costs were reduced by $10 / unit? (6) What would happen to the breakeven point if fixed costs increased $40,000? (7) What is the operating leverage facol for Ritchie Mfg Co? (8) What would happen to the $75,000 net income if sales in units declined 7%? Prove it using a controbution margin income statement

Answer 1

Answer is given below with working notes

Break even point in unit sales Break even point in dollar sales 10,000 $1,500,000 Units Fixed Cost Contribution per unit $720,000 $72.00 10,000 Break even point in dollar sales $1,500,000 Fixed Cost Contribution Margin ratio $ Sales $720,000 $1,500,000 48% $150 $60 Selling price Less: Variable cost Manufacturing cost Selling expenses Total variable cost Contribution margin Contribution margin % $18 $78 $72 48.00% Total $1,500,000 Contribution Margin Income Statement Per Unit | Total Sales $150 Less: Variable cost Manufacturing cost $60 $600,000 Selling expenses $18 $180,000 Contribution Less: Fixed Cost Manufacturing cost $480,000 Selling and administrative cost $240,000 Net Income $780,000 $720,000 $72) $720,000 $0 Break even point proved 3 Net profit Fixed Cost Total Target $75,000 $720,000 $795,000 Units Total Travelerta per unit $795,000 $72.00 11,042 Contribution per unit Break even point in dollar sales $1,656,250 $ Sales Total Target Contribution Margin ratio $795,000 48% $1,656,250 4 Margin of Safety Total Sales Break even sales Margin of Safety $1,656,250 $1,500,000 $156,250 5 If variable cost is reduced by $10 Contribution per unit will increase Hence Break even point will reduce Units Fixed Cost $720,000 $82.00 8,780 Contribution per unit 6 If Fixed costs is increased by $40,000 Break even point will increase Units Fixed Cost Contribution per unit $760,000 $72.00 10,556 7 Operating Leverage for 11,042 units Contribution Net Income $795,000 $75,000 10.60 8 Sales decline by 7% Operating leverage Decline in sales Decline in profit 10.60 A 7% B 74.20% AXB Revised sales units 1 10,269 93% of 11,042 Total $1,540,350 Contribution Format Income Statement Per Unit | Total Sales $150 Less: Variable cost Manufacturing cost $60 $616,140 Selling expenses $18 $184,842 Contribution Less: Fixed Cost Manufacturing cost $480,000 Selling and administrative cost $240,000 Net Income $800,982 $739,368 $720,000 $19,368 Existing profit Decline Decline % $75,000 $55,632 74.18% Decline in profit is proved