Question

Exercise 3.27 Novak produces one single product, a small reading tablet, and sells it at $90 per unit. Its current annual sales are $162,000. Its annual fixed costs include factory rent, $30,780; depreciation expense; equipment, $8,100; utilities, $16,200; insurance, $6,480. Its variable costs include materials, $27 per unit, and direct labour, $36 per unit. Novak's income tax rate is 20%. What is the contribution margin per unit? Contribution margin per unit s LINK TO TEXT LINK TO TEXT LINK TO TEXT What is the contribution margin ratio? Contribution margin ratio LINK TO TEXT LINK TO TEXT LINK TO TEXT How many units must Novak sell to break even? (Round answer to the next whole integer, e.g. 1,255.) Sales units LINK TO TEXT LINK TO TEXT LINK TO TEXT

Answer 1

Req 1.
Contribution margin per unit:
Selling price per unit				90
Less: Variable cost per unit
Material cost per unit			27
labour cost per unit			36
Total Variable cost per unit				63
Contribution margin per unit:				27
Req 2.
Contribution margin ratio:
Contribution margin per unit				27
Divide: Selling price				90
CM ratio				30%
Req 3.
Total fixed cost:
Factory rent			30780
Ddepreciation			8100
Utilities			16200
Insurance			6480
Total fixed cost:				61560
Divide: Contribution margin per unit				27
Break even units				2280
Req 4.
After tax profits			14000
tax rate			20%
Desired profits after tax			17500
	(14000/80 *100)
Add: Fixed cost			61560
Desired contribution			79060
Divide: CM ratio			30%
Desired sales in $			263533
Desired sales in Units			2928	units
(263533 / 90)
Degree of Operating leverage:
Contribution margin (2928*27)				79060
Divide: Net Income before tax				17500
Degree of Operating leverage:				4.52
Margin of Safety:
Sales required				2928	units
Less: Break even units				2280	units
Margin of Safety:				648	units
Req 5.
After tax Profits as % of sales				8%
Tax rate				20%
Before tax desired profits as % of sales				10%
		(8% /80% *100)
Variable cost ratio as % of sales				70%
	(100- CM ratio i.e. 30%)
Combined of profits and variable cost				80%	of sales
Fixed cost as % of sales should be				20%	of sales
Now, Total fixed cost = 61560
It should be 20% of sales
Therefore, Desired sales = 61560 /20% = $ 307800
Desired sales in units = 307800/90 = 3420 units