Question

REVIEW PROBLEM Breakeven/Profit Planning Analysis Instrument City, Inc., is a major producer of pipe organs. Its Model D14 is a double-man- ual organ with a large potential market. On the next page is a summary of data from 20x1 operations for Model D14. Variable costs per unit Direct materials $ 2,300 Direct labor 800 Manufacturing overhead 600 Selling expense 500 Total fixed costs Manufacturing overhead 195,000 Advertising 55,000 Administrative expense 68,000 Selling price per unit 9,500 1. Compute the 20xl breakeven point in units. 2. Instrument City sold sixty-five D14 models in 20xl. How much net income did the firm realize? 3. Management is considering alternative courses of action for 20x2. (Use the figures from 2 and treat each alternative independently.) a. Calculate the number of units that must be sold to generate a net income of $95,400. Assume that costs and selling price remain constant. alculate the net income if the company increases the number of units sold by 20 percent and cuts the selling price by $500 per unit. c. Determine the number of units that must be sold to break even if advertising is increased by $47,700. d. If variable costs are cut by 10 percent, find the number of units that must be sold to generate net income of $125,000.

Answer 1

In the books of Instrument City, Inc
Computation of Total Variable Cost Per Unit
Particulars		Cost per Unit ($)
Direct Material		2,300.00
Direct labour		800.00
Manufacturing Overhead		600.00
Selling Expense		500.00
Total Variable Cost Per Unit		4,200.00
Computation of Total Fixed Cost
Particulars		Amount ($)
Manufacturing Overhead		1,95,000.00
Advertising		55,000.00
Admisnitrative Exp		68,000.00
Total Fixed Cost		3,18,000.00
Selling Price Per unit ($)		9,500.00
Contribution Per Unit ($) =	Sellind Price - Variable Cost	=	5,300.00
Break Even Point (In Units)	Total Fixed Cost / Contribution Per unit	=	60
Answer No 1	Break Even Point in units for 20X1 is 60 Units

Answer 2: Net Income when sales is 65 units od Model D14 in 20X1
Particulars			Amount ($)
Sales Price	(65*9500)		6,17,500.00
Variable Cost	(65*4200)		2,73,000.00
Contribution			3,44,500.00
Less: Fixed Overheads			3,18,000.00
Net Income from 20X1			26,500.00
Answer 3a: Number of units to be sold in 20X2 to generate Income $ 95400.00
Particulars			Amount ($)
Net Estimated Income from 20X2			95,400.00
Fixed Overhead			3,18,000.00
Contribution			4,13,400.00
Contribution / unit			5,300.00
Units Sold	Contribution/ Contribution per unit		78
Answer 3b: Net Income when sales is increased by 20% and Sales Price reduced by $500 per unit
Particulars			Amount ($)
Sales Price per unit	(9500-500)		9,000.00
Units Sold	(65*120%)	78
Total Sales Price	(78*9000)		7,02,000.00
Variable Cost	(78*4200)		3,27,600.00
Contribution			3,74,400.00
Less: Fixed Overheads			3,18,000.00
Net Income from 20X1			56,400.00
Answer 3c: Number of units to be sold in 20X2 for break point even when advertising cost increase by $ 47700.00
Particulars			Amount ($)
Net Estimated Income at Break Even Sales			-
Fixed Overhead	(318000+47700)		3,65,700.00
Contribution			3,65,700.00
Contribution / unit			5,300.00
Units Sold	Contribution/ Contribution per unit		69
Answer 3d: variable cost cut by 10 % Profit to get is $125000.00. Calculation of Units Sold
Particulars			Amount ($)
Sales Price per unit			9,500.00
Variable Cost per unit	(4200*90%)		3,780.00
Contribution/ unit			5,720.00
Particulars			Amount ($)
Net Estimated Income at Break Even Sales			1,25,000.00
Fixed Overhead			3,18,000.00
Contribution			4,43,000.00
Units to be Sold	Contribution/ Contribution per unit		77.4475524
	Rounded Off		78