Question

This year Burchard Company sold 28.000 units of its only product for $19.40 per unit. Manufacturing and selling the product required $113.000 of fixed manufacturing costs and $173.000 of fixed selling and administrative costs. Its per unit variable costs follow. $ 3.30 2.30 Material Direct labor (paid on the basis of completed units) Variable overhead costs Variable selling and administrative costs 0.33 0.13 Next year the company will use a new material, which will reduce material costs by 50% and direct labor costs by 50% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory's output is nearing its annual output capacity of 33,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 20%. This plan will decrease unit sales volume by 5%. Under both plans, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same. Problem 18-6A Part 1 Required: 1. Compute the break-even point in dollar sales for (a) plan 1 and (b) plan 2 (Round "per unit answers" and "CM ratio" percentage answer to 2 decimal places.) Plan 1 Plan 2 Per unit: Sales Variable Costs: Material Direct labor Variable overhead costs Variable S&A costs Total variable costs 0.00 0.00 Contribution margin Plan 1 Contribution Margin Ratio Choose Numerator: 1 1 Choose Denominator: = Contribution Margin Ratio Contribution margin ratio = Break-Even Point in Dollars Choose Numerator: Choose Denominator: Break-Even Point in Dollars Break-even point in dollars Plan 2 Contribution Margin Ratio !1 Contribution margin ratio 0 Break-Even Point in Dollars Break-even point in dollars 0

Answer 1

Req 1	Per unit:			Plan 1		Plan 2
		Sales		19.40		23.28
	Variable Costs:
	Material	1.65	1.65
	Direct labor	1.15	1.15
	Variable overhead costs	0.33	0.33
	Variable S&A costs	0.13	0.13
	Total variable costs	3.26	3.26
	Contribution margin	16.14	20.02
	Plan 1
	Contribution Margin Ratio
		Choose Numerator:	/	Choose Denominator:	=	Contribution Margin Ratio
		Contribution margin per unit	/	Sales per unit	=	Contribution margin ratio
	16.14	/	19.40	=	83.20%
	Break-Even Point in Dollars
		Choose Numerator:	/	Choose Denominator:	=	Break-Even Point in Dollars
		Total fixed costs	/	Contribution margin ratio	=	Break-even point in dollars
	286,000	/	83.20%	=	343,767.04
	Plan 2
	Contribution Margin Ratio
		Contribution margin per unit	/	Sales per unit	=	Contribution margin ratio
	20.02	/	23	=	86.00%
	Break-Even Point in Dollars
		Total fixed costs	/	Contribution margin ratio	=	Break-even point in dollars
	286,000	/	86.00%	=	332,571.43
Req 2	BURCHARD CO.
	Forecasted Contribution Margin Income Statement
		Plan 1	Plan 2
	Number of units:	28,000	26,600
	Sales	543,200	619,248
	Variable costs	91,280	86,716
	Contribution margin	451,920	532,532
	Fixed costs	286,000	286,000
	Income before taxes	165,920	246,532
	Income taxes	49,776	73,960
	Net Income (loss)	116,144	172,572