Question

Problem 5-6A (Video) (Part Level Submission) Sunland Corporation has collected the following information after its first year of sales. Sales were $1,600,000 on 100,000 units, selling expenses $200,000 (40% variable and 60% fixed), direct materials $508,000, direct labor $290,400, administrative expenses $278,000 (20% variable and 80% fixed), and manufacturing overhead $380,000 (70% variable and 30% fixed). 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. (a) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed 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 $

Answer 1

(1)	Contribution margin for current year                      [Refer working note 1]	$400,000
	Contribution margin for projected year                   [Refer working note 2]	$440,000
(2)	Fixed costs                                                               [Refer working note 3]	$456,400

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Working note 1 - Contribution margin for the current year
Sales	$1,600,000
Variable costs                 [Refer working note 3]	$1,200,000
Contribution margin        [Sales - Variable costs = $1,600,000 - $1,200,000]	$400,000

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Working note 2 - Contribution margin for the projected year
Sales                               [Refer working note 4]	$1,760,000
Variable costs                 [Refer working note 5]	$1,320,000
Contribution margin       [Sales - Variable costs = $1,760,000 - $1,320,000]	$440,000

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Working note 3 - Division of total cost into variable cost and fixed cost
	Total cost (a)	Variable % (b)	Fixed % (c)	Variable cost (a x b)	Fixed cost (a x c)
Selling expenses	$200,000	40%	60%	$80,000	$120,000
Direct materials	$508,000	100%		$508,000	$0
Direct labor	$290,400	100%		$290,400	$0
Administrative expenses	$278,000	20%	80%	$55,600	$222,400
Manufacturing overhead	$380,000	70%	30%	$266,000	$114,000
Total				$1,200,000	$456,400

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Working note 4 - Sales for the projected year
Sales for the current year	$1,600,000
Percentage increase in sales	10%
Sales for the projected year      [$1,600,000 x (100% + 10%)]	$1,760,000

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Working note 5 - Variable cost for the projected year
Variable cost for the current year     [Refer working note 3]                           (a)	$1,200,000
Units produced                           [Mentioned in the question]                           (b)	100,000
Variable cost per unit                                                                                       (c = a / b)	$12
Units sold during the projected year    [100,000 units x (100% + 10%)]           (d)	110,000
Variable cost for the projected year                                                                    (c x d)	$1,320,000

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