Question

Jaguar Manufacturing produces and sells pencils. Currently, 5,000,000 pencils are sold per year at $1.50 each Fixed costs are $950,000 per year. Variable costs per unit equal $0.6 per pencil. Required: 1.(a) What is the current annual operating income? [3 points] (b) What is the current breakeven point in revenues? [4 points) 2. Compute the operating income and breakeven point in revenues for the following independent cases: (a) A 10% increase in fixed costs. [5 points) (b) A 10% increase in the selling price per pencil and a $20,000 increase in fixed costs. [7 points) W

Answer 1

Answer

Fixed cost = $950,000

Variable cost = $0.6

Selling price = $1.50

Contribution margin per unit = selling price - variable cost

Contribution margin per unit = 1.50 - 0.6 = $0.9

Contribution margin ratio = (contribution margin per unit / selling price) × 100

Contribution margin ratio = (0.9 / 1.50) × 100 = 60%

1 a 5,000,000 units are sold

Total contribution margin for 5,000,000 units

= 5,000,000 × 0.9 = $4,500,000

Operating profit from the sales of 5,000,000 units

= 4,500,000 - 950,000 = $3,550,000

Current annual operating income is $3,550,000

b Current break even point in revenue

= fixed cost / contribution margin ratio

Current break even point in revenue

= 950,000 / 60% = $1,583,333

Current break even point in revenue is $1,583,333

2 a New fixed cost = 950,000 + 10% = $1,045,000

OPERATING INCOME

Contribution margin from the sales of 5,000,000 units

= 5,000,000 × 0.9 = $4,500,000

Operating income from the sales of 5,000,000 units

= 4,500,000 - 1,045,000 = $3,455,000

Operating income is $3,455,000

BREAK EVEN POINT IN REVENUE

Break even point in revenue

= 1,045,000 / 60% = $1,741,667

$1,741,667 is the break even point in revenue.

b New selling price = 1.50 + 10% = $1.65

New fixed cost = 950,000 + 20,000 = $970,000

New contribution margin per unit = 1.65 - 0.6 = $1.05

contribution margin ratio = (1.05 / 1.65) × 100 = 63.63%

OPERATING INCOME

Total contribution margin

= 5,000,000 × 1.05 = $5,250,000

Operating income

= 5,250,000 - 970,000 = $4,280,000

BREAK EVEN REVENUE

Break even revenue = 970,000 / 63.63% = $1,524,438

$1,534,438 is break even point in revenue.

Calculations of operating income and break even revenue under different situations.

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