I need help trying to figure out if I am calculating everything correctly. Break
ID: 2372980 • Letter: I
Question
I need help trying to figure out if I am calculating everything correctly.
Breakeven Analysis and Pricing
E 9. McLennon Company has a plant capacity of 100,000 units per year, but its
budget for this year indicates that only 60,000 units will be produced and sold.
The entire budget for this year is as follows:
LO4
LO4 LO5
Sales (60,000 units at $4) $240,000
Less cost of goods produced (based on
production of 60,000 units)
Direct materials (variable) $60,000
Direct labor (variable) 30,000
Variable ovesrhead costs 45,000
Fixed overhead costs 75,000
Total cost of goods produced 210,000
Gross margin $ 30,000
Less selling and administrative expenses
Selling (fixed) $24,000
Administrative (fixed) 36,000
Total selling and administrative expenses 60,000
Operating income (loss) ($ 30,000)
1. Given the budgeted selling price and cost data, how many units would
McLennon have to sell to break even? (Hint: Be sure to consider selling and
administrative expenses.)
2. Market research indicates that if McLennon were to drop its selling price to
$3.80 per unit, it could sell 100,000 units. Would you recommend the drop
in price? What would the new operating income or loss be?
Explanation / Answer
Total
Per Unit
Sales
240000
4
Direct Material
-60000
-1
Direct Labor
-30000
-0.5
Variable Overhead
-45000
-0.75
Fixed Overhead
-75000
Fixed
Total COGS
-210000
Gross Margin
30000
Selling
-24000
Fixed
Administrative
-36000
Fixed
Operating Income
-30000
For Breakeven:
Let Quantity be x:
Sales = 4x
Direct Material = -1x
Direct Labor = -0.5x
Variable Overhead = -0.75x
All other costs are fixed
So,
Operating Income = Sales %u2013 Total COGS %u2013 Selling %u2013 Administration
For Breakeven; Operating Income = 0
0 = 4x %u2013 1x %u2013 0.5x %u2013 0.75x -75000 %u2013 24000 %u2013 36000
1.75x = 135000
X = 77142.9 = 77143 (Breakeven Quantity)
If selling Price = $3.8; Quantity = 100000
Per Unit
Total @ 100000
Sales
3.8
380000
Direct Material
-1
-100000
Direct Labor
-0.5
-50000
Variable Overhead
-0.75
-75000
Fixed Overhead
Fixed
-75000
Total COGS
Gross Margin
Selling
Fixed
-24000
Administrative
Fixed
-36000
Operating Income
20000
As operating income is positive and equals $20,000; the firm should lower its price to $3.8.
Total
Per Unit
Sales
240000
4
Direct Material
-60000
-1
Direct Labor
-30000
-0.5
Variable Overhead
-45000
-0.75
Fixed Overhead
-75000
Fixed
Total COGS
-210000
Gross Margin
30000
Selling
-24000
Fixed
Administrative
-36000
Fixed
Operating Income
-30000
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