Donkey corporation has collected the following information after its first year
ID: 2443329 • Letter: D
Question
Donkey corporation has collected the following information after its first year of sales. Net sales were $1,000,000 on 50,000 units; selling expenses $20,000 (30% was able and 70% fixed); direct materials $300,000; direct labor $170,000; administrative expenses $25,000 (30% variable and 70% fixed); manufacturing overhead $240,000 (20% variable and 80% fixed). Top management has asked you to do a CVP analysis so that is can make plants for the coming year. It has projected that unit sales will increase by 20% next year. Compute (1) the contribution margin for the current year and the projected year and (2) the fixed costs for the current year (Assume that fixed costs will remain the same in the projected year.) Compute the break-even point in units and sales dollars for the current year. The company has a target income of $187,000. What is the required sales in this dissimilar for the company to meet its target? If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio? The company is considering a purchase of equipment that would replace its direct labor costs by $70,000 and would change its manufacturing overhead costs to 10% and variable and 90% fixed (assume total manufacturing overhead cost is $24,000, as about. It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 80% variable and 20% fixed (assume total selling expense is $20,000 as above). Compute (1) the contribution margin and (2) the contribution margin ratio, and (3) recomputed the break-even point in sales dollars. Comment on the effect each of management's proposed changes has on the break-even point.Explanation / Answer
Donkey Corporation
CVP Analysis for the Current year
_________________________________________
Per Unit Total
Net Sales Revenue (50,000 units) $20.00 $1,000,000
Less : Variable Costs
Direct Materials $6.00 $300,000
Direct labors $3.40 $170,000
Manufacturing Overheads $0.96 $48,000
Selling Expenses $1.20 $60,000
Administartive Expenses $1.50 $75,000
Total Variable Expenses $13.06 $653,000
Contribution Margin $6.94 $347,000
Fixed Costs
Manufacturing Overheads $192,000
Selling Expenses $140,000
Administartive Expenses $175,000
Total Fixed Costs $507,000
Donkey Corporation
Projected CVP Analysis for the Next year
_________________________________________
Per Unit Total
Net Sales Revenue (60,000 units) $20.00 $1,200,000
Less : Variable Costs
Direct Materials $6.00 $360,000
Direct labors $3.40 $204,000
Manufacturing Overheads $0.96 $57,600
Selling Expenses $1.20 $72,000
Administartive Expenses $1.50 $90,000
Total Variable Expenses $13.06 $783,600
Contribution Margin $6.94 $416,400
(b)
Break Even Points (Units) $507,000 / $6.94 = 73,054.75 i.e. 73,055 units
Break Even Points (Units) 73,055 units x $20 = $1,461,100
(c) Units required to be sold = ($507,000 + $187,000) / $6.94
= $694,000 / $6.94 = 100,000 units
Sales required in dollars = 100,000 x $20 = $2,000,000
(d) (100,000 - 73,055) / 100,000 = 26.94%
(e) Option 1 - Purchase of Equipment
Donkey Corporation
CVP Analysis
_________________________________________
Per Unit
Selling Price $20.00
Less : Variable Costs
Direct Materials $6.00
Direct labors
($170,000 - $70,000) / 50,000 $2.00
Manufacturing Overheads
$240,000 x 10% / 50,000 $0.48
Selling Expenses $1.20
Administartive Expenses $1.50
Total Variable Expenses $11.18
1 Contribution Margin $8.82
2 Contribution Margin ratio = $8.82 x 100 / $20
= 44.10%
3 Break Even (in dollars)
Fixed Costs
Manufacturing Overheads $216,000
Selling Expenses $140,000
Administartive Expenses $175,000
Total Fixed Costs $531,000
BEP (in Sales dollars) = $531,000 / $8.82 = 60,204 units x $20
= $1,204,080
Option 2 - Purchase of Equipment
Donkey Corporation
CVP Analysis
_________________________________________
Per Unit
Selling Price $20.00
Less : Variable Costs
Direct Materials $6.00
Direct labors
($170,000 - $70,000) / 50,000 $2.00
Manufacturing Overheads $0.96
Selling Expenses
($200,000 x 80%) / 50,000 $3.20
Administartive Expenses $1.50
Total Variable Expenses $13.66
1. Contribution Margin $6.34
2 Contribution Margin Ratio = $6.34 x 100 / $20
= 31.7%
3 Break Even (in dollars)
Fixed Costs
Manufacturing Overheads $192,000
Selling Expenses $40,000
Administartive Expenses $175,000
Total Fixed Costs $407,000
BEP (in Sales dollars) = $407,000 / $6.34 = 64,196 units x $20
= $1,283,920
Current Equipment Commission
Contribution Margin $347,000 $441,000 $317,000
Less : Fixed Costs $507,000 $531,000 $407,000
Net Operating Loss ($160,000) ($90,000) ($90,000)
Both the options result in reduction of operating loss by $70,000 i.e. from $160,000 to $90,000
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