P19-2A Poole Corporation has collected the following information after its first
ID: 2346631 • Letter: P
Question
P19-2APoole Corporation has collected the following information after its first year of sales. Net sales were $1,600,000 on 100,000 units; selling expenses $240,000 (40% variable and 60% fixed); direct materials $511,000; direct labor $285,000; administrative expenses $280,000 (20% variable and 80% fixed); manufacturing overhead $360,000 (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.
Your answer is correct.
Compute (1) the contribution margin for the current 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.)
Contribution margin for current year $
Contribution margin for projected year $
Fixed costs for current year $
Your answer is correct.
Compute the break-even point in units and sales dollars for the first year.
Break-even point in units
Break-even point in dollars $
Your answer is correct.
The company has a target net income of $310,000. What are the required sales in dollars for the company to meet its target.
$
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If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? (Round your answer to 1 decimal place, e.g. 25.4.)
%
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The company is considering a purchase of equipment that would reduce its direct labor costs by $104,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is $360,000 as above). It is also considering switching to a pure commission for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $240,000, as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and recompute (3) the break-even point in sales dollars. (Round contribution margin ratio to 2 decimal places, e.g. 0.25 and other answers to 0 decimal places, e.g. 250,000.)
Contribution margin $
Contribution margin ratio
Break-even point in sales $
Can you help me figure out the Contribution Ratio?
Thank you!
Explanation / Answer
1. The contribution margin is $400,000 and $440,000 for the current and projected, respectively. The Fixed for the current year is $476,000. 2. The break-even point in units is 119,000 units and the break-even point in dollars is $1,904,000. 3. The required sales in dollars to meet the target is $3,144,000. Add the target income to the total fixed and divide it to the contribution margin ratio of 25%. 4. The margin of safety ratio is 39%.
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