BACK ugh nting Waterways Continuing Problem (This is a continuation of the Water

Question

BACK ugh nting Waterways Continuing Problem (This is a continuation of the Waterways Problem from Chapters 1 through 4.) WCPS Vice President for Sales and Marketing Sam Totter is trying to plan for the com- ing year in terms of production needs to meet the sales demand. He is also trying to deter- ces mine ways in which the company's profits might be increased in the coming year Instructions (a) Waterways markets a simple water control and timer that it mass-produces. During ews 2016, the company sold 696,000 units at an average selling price of per solution $4.20 per unit. The variable expenses were $1,900,080, and the fixed expenses were $683,256. (1) What is the products contribution margin ratio? (Round to nearest whole ter 1 es percentage) (2) What is the company's break-even point in units and in dollars for this product? (3) What is the margin of safety, both in dollars and as a ratio? (Round to nearest (4) If management wanted to increase its income from this product by 10%, how (5) If sales increase by 51,000 units and the cost behaviors do not change, how much whole percentage many additional units would have to be sold to reach this income level? will income increase on this product? deos ties

Explanation / Answer

1 Contribution margin ratio=Contribution/Sales Contribution=Sales -Variable expenses=(696000*4.20)-1900080=$ 1023120 Contribution margin ratio=1023120/(696000*4.20)=0.35 2 Break even point in $=Fixed cost/Contribution margin ratio=683256/0.35=$ 1952160 Break even point in units=Break even point in $/Average selling price=1952160/4.20=464800 units 3 Margin of safety in $=Actual sales-Break even point sales in $=(696000*4.20)-1952160=$ 971040 Margin of safety in ratio=Margin of safety in $/Actual sales=971040/(696000*4.20)=0.3322=33% 4 Desired income=Current income*110% Current income: Sales (696000*4.20) 2923200 Less: Variable expenses 1900080 Contribution margin 1023120 Less: Fixed expenses 683256 Net income 339864 Desired income=339864*110%=$ 373850 Sales in $ to reach desired income=(Fixed expenses+Desired income)/Contribution margin ratio=(683256+373850)/0.35=$ 3020303 Units to be sold to reach desired income=3020303/4.20= 719120 units Additional units to be sold=Desired sales level-Current sales level=719120-696000=23120 units 5 If sales increases by 51000 units Sales level=696000+51000=747000 units Contribution (Sales in $*Contribution margin ratio) (747000*4.20*0.35) 1098090 Less: Fixed expenses 683256 Net income 414834 Increase in income=414834-339864=$ 74970

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