Question

CALCULATOR PULL SCREEN PRINTER RON CEAE Problem 18-06A Oriole Corporation has collected the following information after its first year of sales. Sales were $1,600,000 on 100,000 units, selling expenses $250,000 (40% variable and 60% Pued), direct materials $510,000, direct labor $288,200, administrative expenses $284,000 (20%. variable and 80% fixed), and manufacturing overhead $350,000 (70% variable and 30% fored). 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 foxed 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 $204,000. What is the required sales in dollars for the company to meet its target? Sales dollars required for target net income

Answer 1

DETAILS OF THE CURRENT YEAR ARE AS FOLLOWS:

Sales (units) = 100,000 units

Sales ($) = $ 1,600,000

Selling price/ unit = 1,600,000/100,000 = $ 16/ unit

Selling expenses = $ 250,000 (40% variable,60% fixed)

Variable selling expenses = 40% of $ 250,000 = $ 100,000

Fixed selling expenses = 60% of $ 250,000 = $ 150,000

Direct materials = $ 510,000

Direct labour = $ 288,200

Administrative expenses = $ 284,000 (20% variable, 80% fixed)

Variable administrative expenses = 20% of $284,000 = $ 56,800

Fixed administrative expenses = 80% of $ 284,000 = $ 227,200

Manufacturing Overheads = $ 350,000 (70% variable, 30% fixed)

Variable Manufacturing Overheads = 70% of $ 350,000 = $ 245,000

Fixed Manufacturing Overheads = 30% of $ 350,000 = $ 105,000

(1) Calculation of Contribution Margin for Current Year and Projected Year:

We know that,

Contribution Margin = Sales - Variable Costs

CURRENT YEAR:

Particulars	Amount (in $)
Sales (A)	1,600,000
Less: Variable Costs
Direct Materials	510,000
Direct Labour	288,200
Variable Selling expenses	100,000
Variable Administrative expenses	56,800
Variable Manufacturing Overheads	245,000
Total Variable Costs (B)	1,200,000
Contribution Margin {(A) - (B)}	400,000

PROJECTED YEAR:

Unit sales will increase by 10%

Projected sales units = 100,000 + 10% of 100,000 = 110,000 units

Selling price per unit = $ 16

Sales (in $) = 110,000 * $ 16 = $ 1,760,000

Particulars	Amount
Sales (A)	1,760,000
Variable Costs (1,200,000*110,000/100,000)	1,320,000
Contribution Margin (A)-(B)	440,000

(2) Fixed Costs = Fixed selling expense + Fixed Manufacturing Overheads + Fixed administrative expenses

= 150,000 + 227,200 + 105,000 = $ 482,200

(3) Break even point (units) = Fixed Cost/ Contribution per unit

= 482,200/ 4 = 120,550 units

Break even point ($) = Fixed Cost / P/V ratio

= 482,200/25% = $ 1,928,800

P/V ratio = Contribution / Sales * 100

= 400,000/ 1,600,000 * 100 = 25%

(4) Target net income = $204,000

Desired Sales = (Fixed Cost + Desired Profit)/ PV Ratio

= (482,200 + 204,000) / 25%

= $ 2,744,800

(5) Margin of Safety = Desired Sales - Break even sales

= 2,744,800 - 1,928,800

= $ 816,000

Margin of safety ratio = margin of safety * 100/ Total sales

= 29.728%