SLP 1 Varriable and fixed costs Below find production and sales information for

Question

SLP 1 Varriable and fixed costs
Below find production and sales information for Herrestad Company. We will use this same company for all the SLPs in this course.
Product information

Beginning inventory 0
Units produced 10,000
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Units sold 8,000

Selling price per unit $300
Variable costs per unit
Direct material 120
Direct labor 60
Variable overhead 40
Variable selling and administrative 10

Fixed costs
Fixed manufacturing overhead 250,000
Fixed selling and administrative 100,000


Herrestad Company
Absorption Income Statement
For the period ending Dec. 31, 2011

Sales $2,400,000
Cost of goods sold 1,960,000
Gross profit (margin) $440,000
Selling and administrative expenses 180,000
Net income $260,000
Required:
Prepare a contribution margin (behavioral, variable) income statement for Herrestad Company. Prepare a second version assuming the selling price per unit increases to $320 per unit.
Use the original information to:
• Determine the number of units the company must sell to break even for the year?
• Compute break even assuming direct materials cost increase from $120 to $140, but all information remains the same.
The submission should be 2 to 4 pages and need to in clude answers to all the questions listed above. Show computations, discuss the results and include references in APA format.

Explanation / Answer

INFORMATION GIVEN IN THE ABOVE CASE IS AS FOLLOWS:

REQUIRED SOLUTIONS FROM THE ABOVE INFORMATION IS :

1) CONTRIBUTION MARGIN INCOME STATEMENT:

CONTRIBUTION MARGIN: Contribution margin is the marginal profit per unit sale. It is a form of management accounting in Cost - Volume - Profit analysis. It can be used as a measure of OPERATING LEVERAGE.

FORMULA:

The Unit of Contribution Margin (C) is unit Revenu (Price,P) less Unit Variable cost (V).

C = P - V

Where as

C = Contribution margin

P = Unit revenu/ Sale price per unit

V = Variable cost per unit

SOLUTION :

A) If sale price/Unit is $300, contribution margin Income Statement

P = SALE PRICE/UNIT = $300

V= VARIABLE COST = DIRECT MAT + DIRECT LAB + VARIABLE OH + VARIABLE SELLING & ADMIN

V= VARIABLE COST = $120+$60+$40+$10 = $230

C = CONTRIBUTION MARGIN = P - V

C = CONTRIBUTION MARGIN = $300 - $230 = $70

HERRESTAD COMPANY CONTRIBUTION MARGIN INCOME STATMENT FOR THE YEAR 31/12/2011

CMI = SALES - MANUFACTURING VARIABLE EXP - NON MAN FACT VAR EXP - FIXED MAN FACT AND NON  

          MANFACRURIN EXP= NET OPERATING INCOME

Summary : If sale price/Unit is $300 the contribution margin income of the Herrestad Company is $210,000

B) If we assume sale price/Unit is $320, contribution margin Income Statement of Herrestad Company

Summary : If sale price/Unit is $320 the contribution margin income of the Herrestad Company is $370,000.

2.BREAK EVEN OF THE HERRESTAD COMPANY:

BREAK EVEN POINT(BEP): The level of sales of a good or services, at which the return on investment is exactly equal to the invested. The point at which sales equal to costs.The point is located by break even analysis, which determines the volume of sales at which fixed costs and variable costs will be covered.

All sales above the point will produce profits or any sales below the point will produce losses. Break even analysis is useful in the assessment of project feasibility.

Break Even Point (BEP) = Fixed cost + Variable Cost = Revenue

Formula:

Break even point can be calculated using the following two methods

1. Equation Method

2. Contribution Margin Method

Here we are going with Contribution Margin Method

Contribution Margin Method : Each unit sold provides a certain amount of revenue to cover the fixed cost, to find out the how many units must be sold to cover the fixed cost is break even point sales.

Break Even Point Sales (BEP) = Fixed cost / Unit Contribution Margin

Here in this Case

Fixed Cost= $350,000

Contributionh Margin = $70

Break Even Point Sales (units) =$350,000/$70 = 5000 units

Summary : For achieving break even point (BEP), the Herrestad company must sale the 5000 units, here company has sold more than 5000 units in the year.Therefore company is already in profits, it has sold 3000 units more than the break even point sales.

3. Break Even Point if Direct Material cost increases to $140

First calculate Contribution Margin per unit

C = P - V

Where as

C = Contribution margin

P = Unit revenu/ Sale price per unit

V = Variable cost per unit

Contribution Margin Calculation

P = SALE PRICE/UNIT = $300

V= VARIABLE COST = DIRECT MAT + DIRECT LAB + VARIABLE OH + VARIABLE SELLING & ADMIN

V= VARIABLE COST = $140+$60+$40+$10 = $250

C = CONTRIBUTION MARGIN = P - V

C = CONTRIBUTION MARGIN = $300 - $250 = $50

Fixed Cost= $350,000

Break Even Point Sales (BEP) = Fixed cost / Unit Contribution Margin

Break Even Point Sales (BEP) =$350000/$50 = 7000 units

Summary : If direct material cost increases from $120 to $140, Herrestad company has to sold 7000 units to achieve the break even point in sales. In this present scenario the Herrestad company is still managing the profits after material prices increases.

HERRESTAD COMPANY PRODUCTION AND SALES INFORMATION



NO OF UNITS
OPENING INVENTORY
0

PRODUCTION

10000

SALES


-8000

CLOSING INVENTORY
2000








SALE PRICE/UNIT

$300








VARIABLE EXPENSES PER UNIT



DIRECT MATERIAL

$120

DIRECT LABOUR

$60

VARIABLE OVERHEAD
$40

VARIABLE SELLING & ADMIN
$10

TOTAL VARIABLE COST/UNIT
$230








FIXED COSTS FOR THE YEAR



FIXED MANUFACTURING OVER HEAD $250,000

FIXED SELLING & ADMINISTRATIVE $100,000

TOTAL FIXED COST

$350,000

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