Question

apter 22 Questions 6-7 (of 8) The following information applies to the questions displayed below.] This year Cairo Company sold 30,000 units of its only product for $19.00 per unit. Manufacturing and selling the product required $115,000 of fixed manufacturing costs and $175,000 of fixed selling and administrative costs. Its per unit variable costs follow Material Direct labor (paid on the basis of completed units) Variable overhead costs Variable selling and administrative costs 3.50 2.50 0.35 0.15 Next year the company will use new material, which will reduc hnaterial costs by 60% and direct labor costs by 40% and will not affect product quality or marketability. Management is considering an increase in the unit sales price to reduce the number of units sold because the factory's output is nearing its annual output capacity of 35,000 units. Two plans are being considered. Under plan 1, the company will keep the 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 price by 20%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

Answer 1

Answer 1	Plan 1	Plan 2
Brekeven in $=Fixed cost/CM ratio	35318475	340816
	(175000+115000)/.8211	(175000+115000)/.8509
If CM ratio is rounded to 2 decimal
	Plan 1	Plan 2
Calculation of CM ratio
Selling price S	$19	22.80
		(19*1.2)
Less: Variable cost
Material (3.5*40%)	1.4	1.4
Labor (2.5*60%)	1.5	1.5
Variable overhead	0.35	0.4
Variable S & A cost	0.15	0.2
Total variable cost	3.4	3.4
Contribution Margin C	$15.60	$19.40
CM ratio C/S*100	82.11	85.09
ans 2
Forecasted Cntributin Margin Income statement
	Plan 1	Plan 2
Sales in units	30000	27000
Sales (30000*19),(27000*22.8)	$570,000	615600
Less: Variable cost
Material (1.4*30000),(1.4*27000)	42000	37800
Labor (1.5*30000),(1.5*27000)	45000	40500
Variable overhead (.35*30000 and 27000)	10500	9450
Variable S & A cost	4500	4050
Total variable cost	102000	91800
Contribution Margin C	$468,000	$523,800
Less: Fixed cost
Fixed overhead cost	175000	175000
Fixed Selling & adm cost	115000	115000
Total fixed cost F	290000	290000
Income before taxes I=C-F	$178,000	$233,800
Income taxes I *30%	$53,400	$70,140
Net Income	$124,600	$163,660