The Desk Company manufactures two types of desks: large desks and standard desks
ID: 2411809 • Letter: T
Question
The Desk Company manufactures two types of desks: large desks and standard desks. Total budgeted sales revenue for 2015 is $264,000, comprising $96,000 from expected large desk sales and $168,000 from expected standard desk sales. The respective budgeted variable manufacturing costs are $48,000 for large desks and $56,000 for standard desks. For 2015, fixed selling and administration costs are budgeted at $10,000 and fixed manufacturing costs are budgeted at $44,000. In addition, variable selling & administration costs are budgeted at $2 for each large desk and $1 for each standard desk. Also, the company has budgeted production of 12,000 large desks and 28,000 standard desks and it expects to sell all the desks produced in 2015. Required: 1) Given the sales mix (based on budgeted sales volume), how many desks of each type 2) What is the sales revenue at the breakeven point calculated in part (1). Show all 3) Define the term "safety margin and explain how an understanding of the "safety must be sold for the company to breakeven? Show all calculations. calculations margin" concept can assist managers in decision making. 4) Calculate the safety margin (in sales $) for The Desk Company (show all workings).Explanation / Answer
1. Selling price for large desk = Expected Sales Revenue / Expected Unit Sales = $ 96,000 / 12,000 desks = $ 8 per desk.
Selling price per standard desk = $ 168,000 / 28,000 = $ 6.
At break-even point, Total Contribution Margin = Total Fixed Cost.
Let the break-even quantity be Q.
$ 2 x (12,000 / 40,000) Q + $ 3 ( 28,000 / 40,000) Q = $ 54,000.
0.6Q + 2.1 Q = 54,000.
Q = 54,000 / 2.7 = 20,000 units.
Total break-even sales volume is 20,000 units, 6,000 lage desks and 14,000 standard desks.
2. Sales revenue at the break-even point: $ 132,000.
Large desks : $ 8 x 6,000 = $ 48,000.
Standard desks : $ 6 x 14,000 = $ 84,000.
Total sales revenue at break-even = $ 48,000 + $ 84,000 = $ 132,000
3. The safety margin is excess of actual / budgeted sales over break-even sales. It indicates to what extent sales can fall before the company touches break-even point and then operating loss beyond the break-even. A higher safety margin reduces the risk of business loss.
4. Safety Margin = Budgeted Sales - Break-even Sales = $ 264,000 - $ 132,000 = $ 132,000.
Large Desk Standard Desk Unit Selling Price $ 8 $ 6 Less: Variable Costs Manufacturing 4 2 Selling and Administrative 2 1 Total Variable Cost per Unit $ 6 $ 3 Contribution Margin per unit $ 2 $ 3Related Questions
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