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 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 costs is $360,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is $240,000, as above). Assuming that net sales remain at first-year levels, compute (1) the contribution margin and (2) the contribution margin ratio, and recomputed (3) the break-even point in sales dollars. Comment on the effect each of management

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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