UESTION 1 Incy Wincy Company developed the following information for its product
ID: 2334442 • Letter: U
Question
UESTION 1 Incy Wincy Company developed the following information for its product: Selling price per unit Less: Variable costs per unit Contribution margin per unit Per unit RM90 54 36 Total fixed costs RM1,260,000 Instructions: Answer the following independent questions and show computations to support your answers (a) How many units must be sold to break even? (1.5 marks) (b) What is the total sales that must be generated for the company to earn a profit of RM60,000? (2.5 marks) If the company is presently selling 45,000 units, but plans to spend an additional RM90,000 on an advertising program, how many additional units must the company sell to earn the same net income it is now making? (c) (1.5 marks) (d) Using the original data in the problem, compute a new break-even point in units if the unit sales price is increased 10%, unit variable cost is increased by 5%, and total fixed costs are increased by RM220,500. (2.5 marks) (e) Calculate the margin of safety ratio assuming that the actual sales are RM4,500,000. (2 marks)Explanation / Answer
Answer to Part a.
Break Even Point (in Units) = Fixed Cost / Contribution Margin per Unit
Break Even Point (in Units) = 1,260,000 / 36
Break Even Point (in Units) = 35,000
Answer to Part b.
Let the Units sold be “x” to earn a profit of RM60,000.
Profit = (Contribution Margin per unit * Units Sold) – Fixed Cost
RM60,000 = (RM36 * x) – RM1,260,000
RM1,320,000 = RM36 * x
x = 36,666.67 or 36,667 units
Therefore, 36,667 units must be sold to earn a profit of RM60,000.
Answer to Part c.
Profit = (Contribution Margin per unit * Units Sold) – Fixed Cost
Current Net Income = (45,000 * RM36) – RM1,260,000
Current Net Income = RM1,620,000 – RM1,260,000
Current Net Income = RM360,000
Calculation if additional RM90,000 is spent on advertising program:
Expected Fixed Cost = RM1,260,000 + RM90,000
Expected Fixed Cost = RM1,350,000
Profit = (Contribution Margin per unit * Units Sold) – Fixed Cost
Let the Units sold be “x” to achieve same Net Income of RM360,000
RM360,000 = (RM36 * x) – RM1,350,000
RM1,710,000 = RM36 * x
x = 47,500
The same Net income of RM360,000 after spending additional RM90,000 on advertising program can be achieved by selling 47,500 units.
Additional Units required to be sold = 47,500 – 45,000
Additional Units required to be sold = 2,500
Answer to Part d.
Proposed Selling Price = RM90 + (RM90 * 10%)
Proposed Selling Price = RM99
Proposed Variable Cost = RM54 + (RM54 *5%)
Proposed Variable Cost = RM56.70
Proposed Fixed Cost = RM1,260,000 + RM220,500
Proposed Fixed Cost = RM1,480,500
Proposed Contribution Margin per Unit = RM99 – RM56.70
Proposed Contribution Margin per Unit = RM42.30
Break Even Point (in Units) = Fixed Cost / Contribution Margin per Unit
New Break Even Point (in Units) = 1,480,500 / 42.30
New Break Even Point (in Units) = 35,000
Answer to Part e.
Margin of Safety ratio = (Current Sales – Break Even Sales) / Current Sales * 100
Break Even Sales = 35,000 * RM90
Break Even Sales = RM3,150,000
Margin of Safety ratio = (RM4,500,000 – RM3,150,000) / RM4,500,000 * 100
Margin of Safety ratio = 30%
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