Lorge Corporation has collected the following information after its first year o
ID: 1094975 • Letter: L
Question
Lorge Corporation has collected the following information after its first year of sales. Sales were $2,148,800 on 134,300 units; selling expenses $322,320 (40% variable and 60% fixed); direct materials $686,273; direct labor $382,755; administrative expenses $376,040 (20% variable and 80% fixed); manufacturing overhead $483,480 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.
a) Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)
b) compute breakeven point in units and sales dollars for the first year
Explanation / Answer
Soln:
FC = Fixed Cost
C = Contribution
P = Profit
S = Sales
P/V ratio = profit-volume ratio
BE point = Break-even point
MS = Margin of Safety
VC = Total Variable Cost
1 FC = C- P
2 C = FC + P
Profit = Sales - expenses
Profit = $2,148,800 - $128,928 - $682,273 - $ 382,755 - $ 75,208- $338,436
Profit = $541,200
Contribution for the current year = Fixed cost + profit
Contribution for current year = $193,392+$300,832+$145,044 +$541,200 = $1,180,468
Contribution for next year
Projected unit sales increase by 10%
Current unit sales = 134,300
10% increase = 147,730 units
variable cost per unit = Total variable cost / No of units
variable cost per unit = 1,607,600 / 147,730 = $ 10.89 per unit
Total cost per unit = fixed cost + variable cost per unit
Total cost = $1,708,296+$10.89 X no of units
Profit = Sales - expenses
Profit = 147,730 unitsX$16- expenses
Profit = 2,363,680 - $128,928 - $682,273 - $ 382,755 - $ 75,208- $338,436
Profit = $ 756,080
Contribution for projected year = fixed cost+profit
Contribution for projected year = $193,392+$300,832+$145,044 +$ 756,080 = $ 1,395,348
Fixed cost for currentyear = Contribution - profit = $ 639,268
b) breakeven point in units and sales dollars for the first year
BEP units = fixed cost / contribution per unit
BEP units = $ 639,268 / 8.789 = 72,728.5 units
BEPsales = fixed cost / contribution per unit X selling price per unit
BEPsales = 72,728.5 X 16 = $ 1,163,656.34
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