Question

Lorge Corporation has collected the following information after its first year of sales. Sales were $1,200,000 on 120,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $291,400; direct labor $250,000; administrative expenses $270,000 (20% variable and 80% fixed); and manufacturing overhead $378,000 (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. It has projected that unit sales will increase by 10% next year.

1. Compute (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.)

-

Fixed costs for current year

2. Compute the break-even point in units and sales dollars for the first year. (Round contribution margin ratio to 2 decimal places e.g. 0.15 and final answers to 0 decimal places, e.g. 2,510.)

-Break-even point

unitsBreak-even point

$

3. The company has a target net income of $160,000. What is the required sales in dollars for the company to meet its target?

Sales dollars required for target net income

$

4. The company is considering a purchase of equipment that would reduce its direct labor costs by $100,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $378,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $250,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution margin ratio to 2 decimal places, e.g. 25.25 and all other answers to 0 decimal places, e.g. 2,520. Use the current year numbers for calculations.)

1.		Contribution margin		$
2.		Contribution margin ratio			%
3.		Break-even point		$

Answer 1

Answer 1
Contribution Margin for Current Year
	Current Year
	Per Unit	Total
Sales (120000 units)	$10.00	$1,200,000.00
Less : Variable Expenses
Direct Materials	$2.43	$291,400.00
Direct Labor	$2.08	$250,000.00
Variable Manufacturing Overhead	$2.21	$264,600.00
Variable Selling Expenses	$0.83	$100,000.00
Variable Administrative Expense	$0.45	$54,000.00
Contribution Margin	$2.00	$240,000.00
Contribution Margin for Projected Year
Contribution Margin for Projected Year = Current Year sales units x (1 + sales growth %) x Contribution Margin per unit
Contribution Margin for Projected Year = 120000 units x (1+0.10) x $2.00
Contribution Margin for Projected Year = $2,64,000
Fixed Cost for current Year
Manufacturing Overhead	$113,400.00
Selling Expenses	$150,000.00
Administrative Expense	$216,000.00
Fixed Cost for current Year	$479,400.00
Answer 2
Break even point in units = Total Fixed Expenses / Contribution Margin per unit
Break even point in units = $4,79,400 / $2 = 239700 units
Break even point in sales dollars = Break even units x Selling price per unit
Break even point in sales dollars = 239700 units x $10
Break even point in sales dollars = $23,97,000
Answer 3
Sales dollars required for target net income = [Fixed Expenses + Target Net Income] / Contribution Margin %
Contribution Margin % = Contribution Margin per unit / Selling price per unit = $2 / $10 = 20%
Sales dollars required for target net income = [$4,79,400 + $1,60,000] / 20%
Sales dollars required for target net income = $31,97,000
Answer 4
Contribution Margin for Current Year
	Current Year
	Per Unit	Total
Sales (120000 units)	$10.00	$1,200,000.00
Less : Variable Expenses
Direct Materials	$2.43	$291,400.00
Direct Labor	$1.25	$150,000.00
Variable Manufacturing Overhead	$0.95	$113,400.00
Variable Selling Expenses	$1.88	$225,000.00
Variable Administrative Expense	$0.45	$54,000.00
Contribution Margin	$3.05	$366,200.00
Contribution Margin % = Contribution Margin / Sales = $3,66,200 / $12,00,000 = 30.52%
Break even point in sales dollars = Fixed Expenses/Contribution Margin %
Fixed Cost for current Year
Manufacturing Overhead	$264,600.00
Selling Expenses	$25,000.00
Administrative Expense	$216,000.00
Fixed Cost for current Year	$505,600.00
Break even point in sales dollars = $5,05,600 / 30.52%
Break even point in sales dollars = $16,56,800