Question

Required information [The following information applies to the questions displayed below.] Vernon Company makes and sells products with variable costs of $56 each. Vernon incurs annual fixed costs of $39,900. The current sales price is $77. e. If fixed costs drop to $22,800, what level of sales is required to earn the desired profit? Express your answer in units and dollars. Prepare an income statement using the contribution margin format. Complete this question by entering your answers in the tabs below. Required E1 Required E2 If fixed costs drop to $22,800, what level of sales is required to earn the desired profit? Express your answer in units and dollars. Sales volume in units Sales volume in dollars < Required E1 Required E2 >

Answer 1

Part (e)

If Fixed cost reduces to $ 22800,Sales required to earn the desired profit of $ 4200
	Amount
Current Selling price	$ 77
Variable cost	$ 56
Annual fixed cost	$ 22800
It is assumed that the desired profit $ 4200
Desired profit	$ 4200
Fixed cost	$ 22800
Total contribution required	$27000
Contribution per unit	$ 21
Therefore we can calculate the number of units need to sell earn the contribution of $ 27000
It can be calculated by deviding $ 27000 by $ 21
(27000/21) = 1285.71 OR 1286
Sales volume in units = 1286
Sales volume in dollars (1286 x 77) = $ 99022

VERNON COMPANY
Income statement
Sales value (1286 x 77)	$ 99022
Less:Variable cost (1286 x 56)	$72016
Contribution	$27006
Less:Fixed cost	$22800
Profit	$ 4206
Or it can say that profit is $ 4200

Part (f)

If Variable cost changes to $ 46 ,Sales required to earn the desired profit $ 4200
	Amount
Current Selling price	$ 77
Variable cost	$ 46
Annual fixed cost(It is assumed that fixed cost present level is unchanged)	$39900
It is assumed that the desired profit $ 4200
Desired profit	$ 4200
Fixed cost	$ 39900
Total contribution required	$44100
Contribution per unit( $ 77 - $ 46) =	$ 31
Therefore we can calculate the number of units need to sell earn the contribution of $ 44100
It can be calculated by deviding $ 44100 by $ 31
(44100/31) = 1422.581 OR 1423
Sales volume in units = 1423
Sales volume in dollars (1423x 77) = $ 109571
NOTE:it is assumed that Selling price and fixed cost are not changed in case (f)

VERNON COMPANY
Income statement
Sales value (1423 x 77)	$ 109571
Less:Variable cost (1423 x 46)	$ 65458
Contribution	$44113
Less:Fixed cost	$39900
Profit	$ 4213
Or it can say that profit is $ 4200

Part (g)

Calculation of Margin of Safety
Selling price	$ 66
Variable cost	$46
Fixed cost	$22800
Contribution per unit =Selling price - Variable cost
Which is ( 66-46)	$ 20
Number of units sold	2200
Total sales value(2200x 66)	$ 145200
total contribution is ( 20x 2200)	$ 44000
Less:Fixed cost	$ 22800
Profit	$ 21200
Margine of safety is the poit by which sales volume exeeds the break even sales.it can be calculated by following formula                                                       MOS= Sales -Break even sales
Break even sales is a point at which company makes zero profit,it is calculated by as follows
Break even sales = Fixed cost /contribution per unit
(22800/20)	1140 units
Break even Sales value in dollars (1140 x 66)	$75420
Therefore MOS is ($ 145200- $ 75420)	$ 69780
Margin of safety in units (69780/66)	1058
Margin of safety in dollars$	$ 69780
Margin of safety in % =                                                       (Actual sales-BEP sales)/Actual sales
(145200- 75420) /145200 =	48.06%