Question

you с fa o is с (Show total amounts only.) P6.46A (LO 1, 2, 3, 4) Poole Corporation has collected the following information after its first year of sales. Net sales were $1.6 million on 100,000 units, selling expenses were $240,000 (40% variable and 60% fixed), direct materials were $511,000, direct labour was $285,000, administrative expenses were $280,000 (20% variable and 80% fixed), and manufacturing overhead was $360,000 (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. Management has projected that unit sales will increase by 10% next year. Assume no change in the price of the units. Instructions a. Calculate (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.) tobris b. Calculate the break-even point in units and sales dollars for the first year. c. The company has a target operating income of $310,000. Calculate the required sales amount in dollars for the company to meet its target. d. Assuming the company meets its target operating income number, calculate by what percentage its sales could fall before the company operates at a loss. That is, what is its margin of safety ratio?

Answer 1

Answer a)

	Current Year
Net Sales	$1,600,000
Variable Costs :
Direct Materials	$511,000
Direct Labor	$285,000
Selling Expenses	$96,000
Administrative Expenses	$56,000
Manufacturing Overhead	$252,000
Total Variable Costs	$1,200,000
Contribution Margin	$400,000

Explanation :

Net Sales = $1,600,000 (Given)

Direct Materials = $511,000 (Given)

Direct Labor = $285,000 (Given)

Variable Selling Expenses = 40% of $240,000

= $96,000

​​​​​Variable Administrative Expenses = 20% of $280,000

= $56,000

Variable Manufacturing Overhead = 70% of $360,000

= $252,000

Total Variable Cost = Direct Materials + Direct Labor + Variable Selling Expenses + Variable Administrative Expenses + Variable Manufacturing Overhead

= $511,000 + $285,000 + $96,000 + $56,000 + $252,000

= $1,200,000

Contribution Margin = Sales Revenue - Total Variable Cost

= $1,600,000 - $1,200,000

= $400,000

In the projected year the units sales will increase by 10% with no change in price of unit (Given)

Therefore,

Sales in Projected sales will be 110% (100% + 10%) of the current year sales

Since, units increase by 10%, Variable Cost will also increase be 110% of current year variable cost

	Current Year (100%)	Increase (10% of Current Year)	Projected Year (current year + 10% increase)
Net Sales	$1,600,000	$160,000 (10% of $1,600,000)	$1,760,000
Variable Costs:
Direct Materials	$511,000	$51,100 (10% of $511,100)	$562,100
Direct Labor	$285,000	$28,500 (10% of $285,000)	$313,500
Selling Expenses	$96,000	$9,600 (10% of $96,000)	$105,600
Administrative Expenses	$56,000	$5,600 (10% of $56,000)	$61,600
Manufacturing Overhead	$252,000	$25,200 (10% of $252,000)	$277,200
Total Variable Cost	$1,200,000	$120,000 (10% of $1,200,000)	$1,320,000
Contribution Margin	$400,000	$40,000 (10% of $400,000)	$440,000

Explanation : After 10% increase -

Net Sales in projected year = $1,760,000 (calculated above)

Total Variable Cost in projected year = $562,100 + $313,500 + $105,600 + $61,600 + $277,200

= $1,320,000 (calculated above)

Contribution Margin (in projected year) = Net Sales (in projected year) - Total Variable Cost (in projected year)

= $1,760,000 - $1,320,000

= $440,000

Total Fixed Cost for Current Year = Fixed Selling Expenses + Fixed Administrative Expenses + Fixed Manufacturing Overhead

Fixed Selling Expenses = 60% of $240,000

= $144,000

Fixed Administrative Expenses = 80% of $280,000

= $224,000

Fixed Manufacturing Overhead = 30% of $360,000

= $108,000

Therefore, Total Fixed Cost for the current year = $144,000 + $224,000 + $108,000

= $476,000

Since, it is assumed that fixed cost of projected year will remain same. Therefore, fixed cost of projected year = $476,000

Answer b)

Break-even Point (in units) for the first year = Total Fixed Cost (first year) / Contribution Margin per unit (first year)

Total Fixed Cost (first year) = $476,000 (calculated above)

Contribution Margin per unit = Contribution Margin / Number of Units

= $400,000 / 100,000

= $4

Therefore, Break-even Point (in units) = $476,000 / $4

= 119,000 units

Break-even Point (in sales dollars) (first year) = (Total Fixed Cost in first year / Contribution Margin in first year) * Net Sales in first year

= ($476,000 / $400,000) * $1,600,000

= $1,904,000

Answer c)

Target Operating Income = $310,000 (Given)

Total Fixed Cost = $476,000 (Calculated above)

Target Contribution Margin - Total Fixed Cost = Target Operating Income

Target Contribution Margin - $476,000 = $310,000

Target Contribution Margin = $310,000 + $476,000

Target Contribution Margin = $786,000

Contribution Margin Ratio of Poole corporation = (Contribution Margin / Net Sales) * 100

Contribution Margin Ratio of Poole corporation = ($400,000 / $1,600,000) * 100

Contribution Margin Ratio of Poole corporation = 25%

Note : Contribution Margin Ratio has been calculated using contribution margin and net sales of current year. The same can also be calculated using the contribution margin and net sales of the projected year.

Contribution Margin Ratio = 25%

Contribution Margin Ratio = (Target Contribution Margin / Target Net Sales)

25% = $786,000 / Target Net Sales

Target Net Sales = $786,000 / 25%

= $3,144,000

Answer d)

Margin of Safety Ratio = (Margin of Safety / Actual Sales) * 100

Margin of Safety = Actual Sales - Breakeven Sales

Actual Sales = $3,144,000 (Given)

Break-even sales = Total Fixed Cost / Contribution Margin Ratio

= $476,000 / 25%

= $1,904,000

Margin of Safety = $3,144,000 - $1,904,000

= $1,240,000

Therefore, Margin of Safety Ratio = ($1,240,000 / $3,144,000) * 100

= 39.44%

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