Q 3 Jassim Compagny is producing only one product. Two types of direct materials

Question

Q 3 Jassim Compagny is producing only one product. Two types of direct materials are used to produce this product direct material type A and direct material type B The estimated data for Jassim Compagny is as following: Sales S90,000 Costs: Direct materials typeA $40,000 Hourly employees 15,000 Manager's salary 10,000 Direct materials type B 5,000 Marketing 10.000 Total Costs -80.000 Budgeted pretax profit 10.000 The marketing costs include S5,000 that does not change with the change in sales volumes. The income tax rate is 20%. Compute the revenues needed to achieve a target after-tax income of $30,000 a. b. What is the margin of safety in revenue? (Week 4 chapter) Answer to Question 3

Explanation / Answer

Ans a

Budegeted is as follows:

After tax income require now is $30000. Therefore Pre TAX income = $30000/0.8 = $37500

Contribution = Profit PRE TAX + Fixed cost = 37500 + 15000 = $52500

Contribution margin ratio = 25000/90000 = 27.77777%

Revenue required for to achieve target After Tax Income for $30000 = ($52500/27.7777%) = $189000

NOTE: MANAGER'S SALARY is considered as FIXED

Ans b

Margin of Safety in Revenue = Actual sales - Break even Sales

Breakeven sales = Fixed exp/ contribution margin ratio = $15000/27.77777% = $54000

So, Margin of Safety in Revenue (based on estimated revenue) = $90000 - $54000 = $36000

Margin of Safety in Revenue (based on revenue in answer a) = $189000 - $54000 = $135,000

Particular $ Sales 90000 less Variable cost Material A 40000 Hourly employees 15000 Material B 5000 Marketing 5000 Tot variable cost 65000 Contribution 25000 Less Fixed Cost Managers Salary 10000 Marketing 5000 Total Fixed cost 15000 Pre Tax Profit 10000 Tax @20% 2000 After tax Income 8000

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