Question

The Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the company's profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them. Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 726,000 units at an average selling price of $4.00 per unit. The variable costs were $2,032,800, and the fixed costs were $601,128. What is the product's contribution margin ratio? (Round ratio to 0 decimal places, e.g. 25%.) Contribution margin ratio e Textbook and Media What is the company's break-even point in units and in dollars for this product? Break-even point in units units Break-even point in dollars $ e Textbook and Media What is the margin of safety, both in dollars and as a ratio? (Round ratio to O decimal places, e.g. 25%.) Margin of safety in dollars $ Activate Wil Go to Settingst Margin of safety ratio

Answer 1

Requirement 1 $ 2,904,000.00 $(2,032,800.00) $ Sales Lesss Variable costs Contribution margin 871,200.00 30.00% Contribution margin ratio = Contribution / Sales Requirement 2 Break even point in units Formula : Fixed cost contribution per unit $ Contribution per unit 871200/726000 1.200 Break even point in units = 601128 0.12 500940.00 Units Break even point in dollars Formula Fixed cost / contribution margin ratio Contribution margin ratio Contribution Sales 30.00% 2,003,760.00 Units Break even point in dollars Requirement 3 Margin of safety dollars $ 2,904,000.00 (2,003,760.00) Total sales Less Break even sales Margin of safety dollars 900,240.00 Margin of safety dollars % Margin of safety sales/ Total sales 31.00% 900240/2904000 Requirement 4 $ 270,072.00 $ 27,007.20 $ Net income 871200-601128 additional 10% 297,079.20 No of units sold to get 297079.2 net income= 601128+297079 0.12 748506 Less units sold to get net income of 270072 -726000 Additional units to be sold 22506 units Requirement 5 Sales increase by 51000 units 777000 revised selling units 726000+51000 $ Contribution margin -777000*1.2 Less Fixed cost 932,400.00 $ (601,128.00) $ 331,272.00 $ (270,072.00) Less Normal net income Income will increase by 61,200.00