Lopez Corporation has collected the following information after its first year o

Question

Lopez 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%). 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. Instructions a. The company has a target net income of $310,000. What is the required sales in dollars for the company to meet its target? b. 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?

Explanation / Answer

Please find the calculations as follows:

Sales: 1600000 Variable Cost: DM: 511000 DL: 285000 MO: 360000 *.70 = 252000

Contribution for the current year = 1600000 - 511000 - 285000 - 252000 = 552000

Sales (100000 + 10000) * 16 = 1760000

Variable Cost:

DM: (110000*5.11) = 562100

DL: (110000*2.85) = 313500

MO: (110000*2.52) = 277200

Contribution for the projected year = 1760000 - 562100 - 313500 - 277200 = 607200

Fixed Cost for the Current Year = 240000*.60 + 280000*.80 + 360000*.30 = 476000

Break Even Point = 476000/552000/1600000 = 476000/34.5 = 1379710.15

(Sales Value) Break Even Point in Units = 476000/(16-5.11-2.85-2.52) = 86231.88406 or 86232

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