Demonstration Problem (Question 1 The Power Toot Division of ABC Hawa sells one

Question

Demonstration Problem (Question 1 The Power Toot Division of ABC Hawa sells one product, Jig Saw, and has the following dats for the second quarter 1,200 units s150 Units of output Price per uni Variable cost per unit Total fixed costs 48,000 Required: Determine I. Quarterly operating profit when 1,200 units are sold 2. Break-even volume in units and sales dollars 3. Contribution margin ratio. 4. Sales dollars and units needed to generate an operating profit of $57,000. Number of units sold that would producean operating profit of 15% of sales dollars.

Explanation / Answer

1. Quarterly operating profit

Sales (1200*150) = $180,000

Variable cost(1200*90) =$(108, 000)

Contribution = $72,000

Fixed cost = $(48,000)

Operating profit = $24,000

2. Break even point in units and in dollar sales

   Break even point (in units) = fixed cost/(price - variable cost)

= $48,000/(150-90)

= 800 units

Break even point (in sales dollar) = Fixed cost/contribution margin ratio

= $48,000/40%

= $120,000

3. Contribution margin ratio

= ( Price - variable cost) /price

= (150 - 90)/150

= 40%

4. Sales dollar and units needed to generate an operating profit of $57,000

Sales (in units)= (fixed cost + profit) /(price - variable cost)

   = ($48,000+$57,000)/(150-90)

   = 1750 units

Sales ( in dollar) = (fixed cost+ profit) / contribution margin ratio

   =($48,000+$57,000)/40%

   = $262,500

5. Number of units sold that would produce an operating profit of 15% of sales dollar

Suppose number of units sold is x

Price*x *15% = ( Price - Variable cost)x - fixed cost

150*x*15% = (150-90)x -$48,000

22.50x = 60x-$48,000

$48,000 = 37.50x

x = 1280 units

Therefore 1280 units should be sold to generate an operating profit of 15%.

  

  

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