Magnitude Modems, Inc., makes modem cards that are used in notebook computers. T

Question

Magnitude Modems, Inc., makes modem cards that are used in notebook computers. The company completed the following transactions during 2014. All purchases and sales were made with cash. 1. Acquired $780,000 of cash from the owners. 2. Purchased $285,000 of manufacturing equipment. The equipment has a $33,000 salvage value and a four-year useful life. 3. The company started and completed 5,300 modems. Direct materials purchased and used amounted to $43 per unit. 4. Direct labor costs amounted to $28 per unit. 5. The cost of manufacturing supplies used amounted to $7 per unit. 6. The company paid $53,000 to rent the manufacturing facility. 7. Magnitude sold all 5,300 units at a cash price of $135 per unit. 8. The sales staff was paid a $7.5 per - unit sales commission. 9. Paid $42,000 to purchase equipment for administrative offices. The equipment was expected to have a $3,300 salvage value and a three-year useful life. 10. Administrative expenses consisting of office rental and salaries amounted to $73,450. Required a. Prepare an income statement using the contribution margin format. b. Determine the break-even point in units and in dollars. c. Assume that next year’s sales are budgeted to be the same as the current year’s sales. Determine the margin of safety expressed as a percentage

Explanation / Answer

Answer a: Income Statement as per contribution margin format Sales '5300*135 715500 Less : Variable expenses Direct material '5300*43 227900 Labor '5300*28 148400 Manufacturing Supplied '5300*7 37100 Sales Commission '5300*7.5 39750 Total Variable Expenses 453150 453150 Contribution Margin 262350 Less: Fixed Cost Rent 53000 Administrative Expenses 73450 Depreciation (a) Mfg Equipment 63000 (b) Admin Equipment 12900 75900 Total Fixed Cost 202350 202350 Net Income 60000 Answer b: Breakeven Point in Units Sale Value per Unit 135.00 Variable Cost per Unit 85.50 Contribution per Unit 49.50 Fixed Cost Breakeven Point in Units = ------------------ Contribution per unit '= 202350/49.50 '=4087.87 or 4088 units Breakeven Point in Dollars Breakeven Point in Dollars '= Sales price per unit * breakeven units '= 135*4088 '=551880 Answer c: Margin of safety Current Sales- Break even sales Margin of Safety = ------------------------------------------------ Current Sales '715500-551880 Margin of Safety = ----------------------- 715500 Margin of Safety = 163620/715500 Margin of Safety = 22.87%

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