1. Calculate the contribution margin ratio for the entire firm (2 points) 2. Cal
ID: 2343730 • Letter: 1
Question
1. Calculate the contribution margin ratio for the entire firm (2 points)
2. Calculate the margin of safety (in total sales dollars) based on last year?s data (3 points)
3. Calculate the weighted average contribution margin per unit based on last year?s data (2 points).
4. Assuming that the sales mix remains the same as last year, how many units (in total and by product line) must be sold to earn $143,550 in pre-tax profit (4 points)?
Total Units:
Economy Units:
Deluxe Units:
5. Assume that the company sold the total number of units computed in question 4 above, but that ? of the units were economy and ? deluxe. Without making specific calculations, predict whether the company would make more or less than $143,550 (2 points).
6. For this question only, assume that the company is considering eliminating the economy product because it is not paying its ?fair share? of the fixed costs. Only $20,000 of the total fixed costs are directly attributable to the economy product. The marketing manager estimates that sales of the deluxe product would increase by 10% if consumers did not have the option of buying the lower end product. In addition, the space currently used for the economy model could be used to store finished goods inventory. The company is currently paying $15,000 a year for a finished goods warehouse. How much would profit increase/decrease if the economy product is eliminated?
7. For this question only, assume that Tandem has received a special order request from a foreign customer who wants to buy 5,000 deluxe units at a price of $75 each. The company would save the 5% sales commission it normally pays on the sale of the deluxe product. Assume the company only has 4,000 hours of excess or idle machine capacity, and both the economy and the deluxe product take 1 hour to produce. To fill the special order (which is an all or nothing order), the company would have to forego some sales of either the deluxe or the economy units. If the company accepts the special order, what is the maximum incremental profit they would earn on the special order?
Explanation / Answer
1. Calculate the contribution margin ratio for the entire firm (2 points)
232,000/640,000 = 36.25%
Answer: 36.25%
2. Calculate the margin of safety (in total sales dollars) based on last year’s data (3 points)
= 181,250/0.3625 = $500,000
640,000 – 500,000 = 140,000
Answr: $140,000
3. Calculate the weighted average contribution margin per unit based on last year’s data (2 points).
232,000/10,000 = $23.20 per unit
4. Assuming that the sales mix remains the same as last year, how many units (in total and by product line) must be sold to earn $143,550 in pre-tax profit (4 points)?
One bundle = 3 economy, 2 deluxe
CM per bundle = 12 + 12 + 12 + 40 + 40 = 116
(143550 + 181,250)/116 = 2800 bundles
Total Units: 14,000 units (this is 2800*5)
Economy Units: 8400 units (this is 2800*3)
Deluxe Units: 5600 units (this is 2800*2)
5. Assume that the company sold the total number of units computed in question 4 above, but that ½ of the units were economy and ½ deluxe. Without making specific calculations, predict whether the company would make more or less than $143,550 (2 points).
They would make more money. Because they would be making more units of the deluxe which have a higher contribution margin.
6. For this question only, assume that the company is considering eliminating the economy product because it is not paying its “fair share” of the fixed costs. Only $20,000 of the total fixed costs are directly attributable to the economy product. The marketing manager estimates that sales of the deluxe product would increase by 10% if consumers did not have the option of buying the lower end product. In addition, the space currently used for the economy model could be used to store finished goods inventory. The company is currently paying $15,000 a year for a finished goods warehouse. How much would profit increase/decrease if the economy product is eliminated?
If the economy product is eliminated:
440,000 sales (4400*100)
-264,000 variable costs (4400*60)
= 176,000 contribution margin
- 146,250 fixed costs (-20,000 and -15000)
= 29,750 income
Answr: Profit would decrease by $21,000
7. For this question only, assume that Tandem has received a special order request from a foreign customer who wants to buy 5,000 deluxe units at a price of $75 each. The company would save the 5% sales commission it normally pays on the sale of the deluxe product. Assume the company only has 4,000 hours of excess or idle machine capacity, and both the economy and the deluxe product take 1 hour to produce. To fill the special order (which is an all or nothing order), the company would have to forego some sales of either the deluxe or the economy units. If the company accepts the special order, what is the maximum incremental profit they would earn on the special order?
5% sales commission = 0.05*100 = 5
Variable costs on special order: 60 – 5 = 55
Contribution margin on special order: 75 – 55 = 20; 20*5000 = 100,000
Lost contribution margin on 1,000 economy not made to fill this order: 1,000*12 = 12,000
Maximum incremental profit: 100,000 – 12000 = 88,000
Answer: $88,000
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