Thermal Tent, Inc., is a newly organized manufacturing business that plans to ma

Question

Thermal Tent, Inc., is a newly organized manufacturing business that plans to manufacture and sell 50,000 units per year of a new product. The following estimates have been made of the company's costs and expenses (other than income taxes):

What should the company establish as the sales price per unit if it sets a target of earning an operating income of $260,000 by producing and selling 50,000 units during the first year of operations? (Hint: First compute the required contribution margin per unit.) (Omit the "$" sign in your response.)

At the unit sales price computed in part a, how many units must the company produce and sell to break even? (Assume all units produced are sold.)

What will be the margin of safety (in dollars) if the company produces and sells 50,000 units at the sales price computed in part a? Using the margin of safety, compute operating income at 50,000 units.
(Omit the "$" sign in your response.)

Assume that the marketing manager thinks that the price of this product must be no higher than $94 to ensure market penetration. Will setting the sales price at $94 enable Thermal Tent to break even, given the plans to manufacture and sell 50,000 units?

Fixed Variable per Unit    Manufacturing costs:      Direct materials $ 47               Direct labor 32              Manufacturing overhead $ 340,000 4        Period costs:      Selling expenses 1              Administrative expenses 200,000    Totals $ 540,000 $ 84    

Explanation / Answer

a.

Sales price per unit = 16 + 84 = 100

b.

Break-even point (in units) = fixed cost . Sales price per variable unit cost per unit

= 540,000 (100- 84) = 33,750 units

c.

Using the margin of safety, compute operating income @ 50,000 units.

Margin of safety = Actual sales Break-even sales = 50,000 * 100 33,750 * 100 = 5,000,000 3,375,000 = $1,625,000

Statement of operating income @ 50,000 units Particulars Sales (50,000 * 100) =5,000,000

Less variable cost (50,000 * 84) =4,200,000

Contribution 800,000

540,000

Less fixed cost

Operating income Amount 260,000

d.

Break-even point if sales price is $94

Break-even point (in units) = fixed cost

. Sales price per unit variable cost per unit = 540,000 94 84 = 54,000 units

If Thermal Tent Inc. is planning to manufacture and sell 50,000 units and if the sales price is fixed at $94 then it will not break even at 50,000 units.

If the sales price per unit is charged as $94 then there will be net operating loss incurred by the company.

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