Bath suppliers LTD is a manufacturer of standard fiberglass bathtubs with the fo

Question

Bath suppliers LTD is a manufacturer of standard fiberglass bathtubs with the following costs and selling price.
Selling Price $140 per unit
Variable Manufacturing costs $64 per unit
Fixed Manufacturing Costs $660,000 per year
Variable Selling Expenses $12 per unit
Fixed Selling Expenses $148,000

A) Determine the breakeven point in units and sales dollars.
B) Determine the number of units that must be sold to earn $109,120 after tax of 38 percent.
C) If budgeted pre-tax operating income is $192,000 what is the margin of safety in units?
D) If pre-tax operating income is $192,000--1) What is the degree of operating leverage? 2) What would be the dollar increase in profit if sales icnreased by 10 percent?

Explanation / Answer

a) The formula for calculating the Break-even point in Units is Break-even point in units = Fixed costs / Contribution margin per unit But Contribution margin per unit = Selling price per unit - Variable cost per uit                                                  = $140 - $76                                                  = $64 Fixed Costs = $660,000 + $148,000                    = $808,000 Break-even point in units = Fixed costs / CM per unit                                       = $808,000 / $64                                       = 12,625 units Break-even point in Dollars = Fixed costs / CM ratio But CM ratio = CM per unit / Selling price per unit                      = $64 / $140                      = 0.46 or 46% Substituting the value in the above formula, Break-even point in Dollars = $808,000 / 0.46                                           = $1,756,522 b) To achieve a target sales figure, Units to be sold = (Target income + Fixed costs) /CM per unit                         = ($109,120 + $808,000) / $64                        = $917,120 / $64                        = 14,330 units Therefore, the units that must be sold to earn a target income of $109,120 are $14,330 c) To achieve Actual or Budgeted sales figure, Units to be sold = (Target income + Fixed costs) /CM per unit                          = ($192,000 + $808,000) / $64                          = ($1,000,000 / $64)                          = 15,625 units Margin of safety in units = Budgeted sales -Break-even sales                                      = 15,625 - 12,625                                      = 3,000 units d) The formula to calculate the Degree of Operating leverage is                      DOL = Contribution margin / Net operating income Sales (15,625 * $140) = $2,187,500 VC ( 15,625 * $76)    = $1,187,500 ------------------------------------- Contribution Margin    = $1,000,000 Fixed costs                 = $808,000 ------------------------------------ Net Operating income = $192,000 -----------------------------------                          DOL = $1,000,000 / $192,000                                   = 5.2 Therefore, the Degree of Operating leverage is 5.2 times If sales increase by 10%, then the dollar increase in profit is Sales                         = $2,406,250 VC                            = $1,306,594 ------------------------------------- Contribution Margin    = $1,099,656 Fixed costs                 = $808,000 ------------------------------------ Net Operating income = $291,656 ----------------------------------- Sales                         = $2,406,250 VC                            = $1,306,594 ------------------------------------- Contribution Margin    = $1,099,656 Fixed costs                 = $808,000 ------------------------------------ Net Operating income = $291,656 ----------------------------------- Therefore, the dollar increase in profit is $99,656

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