Ventana Inc. sells a single product for $49. Its management estimates the follow

Question

Ventana Inc. sells a single product for $49. Its management estimates the following revenues and costs for the year 2018: $18.000 21,000 3,000 2,000 $625,000 Selling expenses - Variable Net Sales Direct Materials Direct Labour Mfg Overhead - Variable Mfg Overhead - Fixed 80,000 Selling expenses Fixed 79,000 Admin expenses - Variable 33,000 Admin expenses - Fixed 24,000 Required: 1. Assuming fixed costs and net sales are spread evenly throughout the year, determine 2. Calculate the contribution margin ratio, the annual margin of safety ratio, and the 3. Determine the percentage increase of annual profits if Ventana Inc. increases its selling 4. Assume the price remains at $49 per unit and variable costs remain the same per unit, Ventana's monthly break-even point in (a) units and (b) dollars annual profit price by 23% and all other factors (including demand) remain constant. but fixed costs increase by 20% annually. Calculate the percentage increase in unit sales required to achieve the same level of annual profit calculated in required # 2 5. Determine the sales required to earn an operating income of $370,000 after tax. Perma Inc.'s income tax is 30%

Explanation / Answer

Part 1)

The break-even point is calculate as follows:

Break-Even Point (Units) = Total Fixed Cost/(Selling Price Per Unit - Variable Cost Per Unit)

Break-Even Point (Dollars) = Break Even Point (in Units)*Selling Price Per Unit

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Using the values provided in the question, we get,

Selling Price Per Unit = $49

Sales in Units = Net Sales/Selling Price Per Unit = 625,000/49 = 12,755.10 or 12,755 units

Variable Cost Per Unit = (80,000 + 79,000 + 33,000 + 18,000 + 3,000)/12,755 = $16.70 per unit

Total Fixed Cost = 24,000 + 21,000 + 2,000 = $47,000

Now, we can calculate the break even point as below:

Monthly Break Even Point (in Units) = 47,000/(49 - 16.70)*1/12 = 121.26 or 121 units

Monthly Break Even Point (in Dollars) = Monthly Break Even Point (in Units)*Selling Price Per Unit = $5,941.55

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Part 2)

The contribution margin ratio, annual margin of safety ratio and annual profit is calculated as below:

Contribution Margin Ratio = (Selling Price Per Unit - Variable Cost Per Unit)/Selling Price Per Unit*100 = (49 - 16.70)/49*100 = 65.92% or 66%

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Margin of Safety Ratio = (Net Sales - Break Even Sales)/Net Sales*100 = (625,000 - 5,941.55*12)/625,000*100 = 88.59% or 89%

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Part 3)

The revised annual profit and percentage change in profit is calculated as below:

Now, we can determined percentage change in profit as below:

Percentage Change in Profit = (508,750 - 365,000)/365,000*100 = 39.38% or 39%  

Therefore, the profit will increase by 39.38% with an increase in selling price by 23%.

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Part 4)

The value of sales required to achieve the same level of profit can be calculated with the use of following formula:

Sales (in Units) = (Revised Fixed Cost + Desired Profit)/(Selling Price Per Unit - Variable Cost Per Unit)

Substituting values in the above formula, we get,

Revised Sales (in Units) = (47,000*(1+20%) + 365,000)/(49 - 16.70) = 13,046.12 or 13,046 units

The percentage increase in unit sales to achieve the same level of profit of $365,000 is arrived as follows:

Percentage Increase in Unit Sales = (Revised Sales - Current Sales)/Current Sales*100 = (13,046.12 - 12,755.10)/12,755.10*100 = 2.28%

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Part 5)

The value of sales required to earn an operating income of $370,000 after tax is calculated as follows:

Sales (in Dollars) = (Fixed Cost + Desired Pre-tax Income)/(Contribution Margin Ratio) = (47,000 + (370,000)/(1-30%))/(65.92%) = $873,136.27

Net Sales 625,000 Less Variable Costs: Direct Materials 80,000 Direct Labor 79,000 Mfg Overhead - Variable 33,000 Selling Expenses - Variable 18,000 Admin Expenses - Variable 3,000 Contribution Margin 412,000 Less Fixed Costs: Mfg Overhead - Fixed 24,000 Selling Expenses - Fixed 21,000 Admin Expenses - Fixed 2,000 Annual Profit $365,000

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