Question

A) Further analysis of McCartney Manufacturing’s fixed costs revealed that the company actually faces annual fixed overhead costs of $9,800 and annual fixed selling and administrative costs of $4,200. Variable cost estimates are correct: direct materials cost, $2.40 per unit; direct labor costs, $3.00 per unit; and variable overhead costs, $0.60 per unit. At this time, the selling price of $20 will not change. Complete the following formulas for the revised fixed costs. Enter the ratio as a percentage.

Contribution Margin per Unit

=

$

–

$

=

$

Contribution Margin Ratio	=	$	=	%
		$

Now complete the formulas for (1) the break-even point in sales dollars and (2) the units sold at the break-even point. To calculate this, divide the break-even point in sales dollars by the unit selling price.

Break-Even Point in Sales Dollars	=	$	=	$
		%

Units Sold at Break-Even Point

=

units

Assume that the number of units that McCartney sold exceeded the break-even point by one (1).

How much would operating income be?
$

What would operating income be if the units sold exceeded the break-even point by five (5) units?
$

B) Graph the following on your own paper. At the original position, the break-even point in sales dollars is $24,000 at 500 units. The fixed costs are $8,000.

Assume the slope of the sales line is equal to the selling price. When the two points of the sales line are at the origin and the break-even point, you see that the slope of the line is $48, which means that the selling price is $.

When the two points of the total costs line are at the origin and the break-even point, you see that the slope of the line is $32.00, which means that the variable cost per unit is $.

1. The company sells a fixed asset and reduces fixed costs by $2,000. Variable costs remain the same, which means that the slope does not change. This will cause the break-even point to  move to the left , which means that break-even point in sales dollars decreases .

2. A new supplier can provide a higher-quality product, but direct materials will increase by $4.00 per unit. If the new supplier is used, the slope of the total costs line will be $. , and the break-even point in sales dollars increases .

3. Market research shows that a price decrease will increase the number of units sold. A price decrease will cause the slope of the sales line to decrease . But internal analysis shows that this price decrease will cause the break-even point in sales to shift to the right , which means that more  units will need to be sold to break even.

Answer 1

A) 1) Contribution Margin per Unit = selling price per unit - variable cost per unit

= $20 - $6

= $14

Note:- variable cost per unit = direct materials cost + direct labor costs+ variable overhead costs

= 2.40 + 3.00 + 0.60

= $6

2) Contribution Margin Ratio =  Contribution Margin per Unit / selling price per unit

= $14 / $20

=70%

3) Break-Even Point in Sales Dollars = Fixed cost / Contribution Margin Ratio

= [$9,800 + $4,200] / 0.7

= $14000 / 0.7

= $20000

4) Units Sold at Break-Even Point = Fixed cost / Contribution Margin per unit

=[$9,800 + $4,200] / $14

= $14000 / $14

=1000 units

5) Assume that the number of units that McCartney sold exceeded the break-even point by one (1) unit

Break even sale(1001 units * $20	$20020
less: variable cost (1001 units * $6)	6006
Contribution margin	14014
less: Fixed cost	14000
Operating income	$14

6) Operating income be if the units sold exceeded the break-even point by five (5) units

Break even sale(1005 units * $20	$20100
less: variable cost (1005 units * $6)	6030
Contribution margin	14070
less: Fixed cost	14000
Operating income	$70