Question

2. Cost-Volume-Profit (CVP) Relationships

Bilco Fabrication manufactures one product, a low-cost car battery. Cost analysis by the accounting department has determined that the variable cost per unit is $12. Bilco’s fixed costs amount to $792,480 annually. The company is projecting data based on a sales price of $20. Use the above data to answer the following:

1. What is the contribution margin of Bilco’s battery, stated both as (a) a per-unit dollar amount, and (b) a percentage.

a. ______________ b. _______________

2. Calculate Bilco’s break-even point in number of units.

3. Figure the level of sales that Bilco would have to achieve to reach a target income of $150,000. Indicate your answer in dollars of sales.

4. What would Bilco’s net income be if the company was able to achieve sales of 125,000 batteries?  

5. What is Bilco’s Degree of operating leverage at 125,000 batteries? If sales were to increase by 8%, how much would Net Income increase by (b-% c-$)?

a. _______________ b. _________________ c. _________________

6. Indicate the company’s margin of safety at a projected level of sales of 125,000 units sold, stated in (a) dollars of sales, and (b) as a percentage of sales and (c) units.

         a. _______________ b. _________________ c. _________________

Answer 1

1) a. Contribution Margin per Unit = Sales Price - Variable cost per unit = $20 - $12 = $8.

b) Contribution Margin Ratio = (Contribution margin/Sales Price )* 100 = ($8/20)*100 = 40%.

2) Breakeven Point in Units = Fixed Cost/Contribution margin per unit = $792,480/8 = 396,240 Units.

3)Targeted Sale = (Fixed Cost + Desired Profit)/Contribution margin Per unit   =>$(792,480 + 150,000)/8 = 117,810 Units.

4)Net Income at 125,000 Units. = $207,520.

Particulars	Amount
Sales (125,000 * $20)	$2,500,000
Less : Variable cost (125,000*12)	(1,500,000)
Contribution Margin	1,000,000
Less : Fixed Expenses	(792,480)
Net Operating Income	$207,520.

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