Question

Corporation manufactures inexpensive office chairs. The selling price is $125 per unit, and variable costs amount to $75 per unit. The fixed costs are $300,000 per month. Currently, the company is selling 8,000 chairs per month. Answer each of the following questions, rounding any units to the next higher full unit, if necessary. [The Handout on CVP relationships may help] (a) What are the contribution margin per chair and the contribution margin ratio? (b) What is the current monthly operating income of the company? (c) What is the monthly sales volume (in units and in dollars) at the break-even point? (d) How many chairs must be sold each month to earn a monthly (target) operating income of $50,000? (e) The marketing manager suggests that the company should spend $20,000 on advertising, and lower the selling price to $120. Also, she suggests increasing the selling commission by $5 per chair. The marketing manager's forecast says that the number of chairs sold per month will increase by 20% with these actions. What is the impact of implementing this suggestion on the company's monthly operating income? (f) The production manager suggests that the company should only improve the quality of the material used which will increase the manufacturing cost by $5 per chair. All else will remain the same. His forecast says that the number of chairs sold will increase by 15% with this action. What is the impact of this action on the company's monthly operating income? Show your computation in the form of Incremental Analysis.

Answer 1

Selling Price $125 per unit Variable Cost $75 per unit Fixed Cost $300000 per month a) Current selling Quantity 8000 chairs b) What are the contribution margin per chair and the contribution margin ratio? Contribution margin per chair = Selling Price - Variable cost =$125-$75 50 Contribution margin ratio = Sale price - Variable cost times 100 Sale Price = (125 - 75) times 100 125 40% b) What is the current monthly operating income of the company? Sales (8000 times 125) 10,00,000 Less Variable Expenses (8000 times 75) -6,00,000 Contribution margin 4,00,000 Less: Fixed Expenses V -3,00,000 Operating income 1,00,000 c) What is the monthly sales volume (in units and in dollars) at the break-even point? Break even point in Units = Fixed Expenses/ Contribution margin per unit = 300000/50 6000 units Break even point in dollars = Fixed Expenses/ Contribution margin ratio = 300000/40% 7,50,000 units (same can be calculated as Break even in units times Selling price = 6000 units times $125 per unit) d) How many chairs must be sold each month to earn a monthly (target) operating income of $50,000? Units to be sold = (Fixed expenses + Target profit)/Unit contribution margin = (300000 + 50000)/50 7000 units