Question

Surreal Sound, Inc. manufactures and sells portable mini speakers. Budgeted price and cost data for the next year are as follows: $30.00 Selling price per unit Variable Expenses per unit: Direct material $8.20 $4.00 $6.00 $1.60 $19.80 Direct labor Manufacturing overhead Selling expenses Total variable cost per unit Annual fixed costs: Manufacturing overhead Selling and administrative Total fixed costs $288,000.00 $426,000.00 $714,000.00 Forecasted annual sales revenue $3,600,000.00 Required: (10 points) A) What is the break-even volume for Surreal Sound in units and sales dollars? B) Compute the number of units to achieve an income of $306,000? C) Compute Margin of safety (as a %) and operating leverage for next year. Round your answer to 2 digits. D) Management estimates that direct labor costs can go up by 30% next year. If the DL costs do increase, what selling price will maintain the same contibution margin ratio as budgeted? Round your answer to 2 digits.

Answer 1

Answer

A contribution margin per unit = selling price - variable cost per unit

Contribution margin per unit = 30 - 19.80 = $10.20

Contribution margin ratio = 10.20 / 30 = .34

Fixed cost is $714,000

Break even point in unit = fixed cost / contribution margin per unit

Break even point in unit = 714,000 / 10.20 = 70,000 units

Break even point in dollar = 714,000 / .34 = $2,100,000

Break even point in dollar is $2,100,000 and in unit is 70,000.

2 units sold to achieve desired profit

= (fixed cost + desired profit) / contribution margin per unit

Units sold to achieve desired profit $306,000

= (714,000 + 306,000) / 10.20 = 100,000 units

The company can achieve their targeted profit of $306,000 by selling 100,000 units.

3 Margin of safety = (forecasted annual sales revenue -break even sales revenue) / forecasted annual sales × 100

Margin of safety

= (3,600,000 - 2,100,000) / 3,600,000 × 100 = 41.67%

Operating leverage

Contribution margin = forecasted annual sales revenue × contribution margin ratio

Contribution margin = 3,600,000 × .34 = $1,224,000

Operating income in next year

= (forecasted sales × contribution margin ratio) - fixed cost

Operating income in next year

= (3,600,000 × .34) - 714,000 = $510,000

Operating leverage = contribution margin / operating income

Operating leverage = 1,224,000 / 510,000 = 2.4

Margin of safety in percentage is 41.67% and operating leverage is 2.4

D The contribution margin ratio is .34

Total variable cost = 8.20 + (4 + 30%) + 6 + 1.6 = $21

If the direct labour increase the total variable cost $21.

New selling price to maintain the contribution margin ratio

= variable cost / ( 1 - contribution margin ratio)

= 21 / (1 - .34) = $31.81

Supporting calculations

Contribution margin per unit = 31.81 × .34 = $10.81

Contribution margin ratio = 10.81 / 31.81 = .34

$31.81 is the selling price to maintain contribution margin ratio .34 .

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