During the third year of operations, Memories, Inc. estimates that 415,000 figur

Question

During the third year of operations, Memories, Inc. estimates that 415,000 figurines (385,000 dolls and 30,000 replicas) will be produced. Direct material costs per unit remain at $.74 per doll and $.62 per replica. Direct labor costs are $2.51 per doll and $2.78 per replica. Monthly fixed selling and administrative costs are $15,300 while monthly fixed manufacturing overhead is $2,851. The variable overhead cost is $.55 per figurine. Sales price for the replicas is $5.25 each and the sales price for the dolls is $5.00 each.

Required: (For each independent question, refer to the original information above.)

1.Compute the break-even point in Year 3 for the figurines. How many dolls and how many replicas must be sold to break-even?

2. What options does MI have to reduce the break-even point? Discuss both the quantitative and qualitative factors that must be considered with each option.

3. How many dolls and replicas, respectively, would MI need to sell in Year 3 to earn a before-tax profit of $150,000?

4. If its tax rate is 30 percent, how many figurines does MI need to sell in Year 3 to earn an after-tax profit of $150,000?

5. How will the break-even point change if the sales mix changes to 80 percent dolls and 20 percent replicas?

6. What would happen to the break-even point if labor costs increased by 10 percent for each type of figurine?

7. What would happen to the break-even point if MI increased the sales price of replicas to $5.50 and dolls to $5.25?

Explanation / Answer

Answer 1. Statement of Profit Dolls Replicas Total Per Unit Total Per Unit Total Amount No of Units Sold 385000 30000 415000 Sales (A) $5.00 $1,925,000 $5.25 $157,500 $2,082,500 Less: Variable Costs Direct Material $0.74 $284,900 $0.62 $18,600 $303,500 Direct Labour $2.51 $966,350 $2.78 $83,400 $1,049,750 Variable Overhead $0.55 $211,750 $0.55 $16,500 $228,250 Total Variable Costs (B) $3.80 $1,463,000 $3.95 $118,500 $1,581,500 Contribution (C=A-B) $1.20 $462,000.00 $1.30 $39,000 $501,000 Fixed Cost Manufacturing Overhead $34,212 Selling & Administration Exp $183,600 Total Fixed Cost (D) $217,812 Profit (C-D) $283,188 When an organization produces and sells a number of different products or services, we use the weighted average contribution margin per unit to determine the breakeven point Weighted Avg. Contribution Margin = $501000 (Total Contribution) / 415000 units (No of Units Sold) Weighted Avg. Contribution Margin = $1.21 per Unit Break Even Point = $217812 (Fixed Cost) /$1.21 (Cont. per Unit) = 180423 Units Break Even Point of Dolls = 180423 Units X (385000 units / 415000 units) = 167381 Units Break Even Point of Replicas = 180423 Units X (30000 units / 415000 units) = 13042 Units Answer 2) To reduce the Break Even Point are: 1. Reduce the Fixed Costs 2. Incresae the contribution per unit or Reduce the Variable Costs per Units or increase the selling price per unit Answer 3) Break Even Point = $217812 (Fixed Cost) + $150000 (profit) /$1.21 (Cont. per Unit) = 304675 Units Break Even Point of Dolls = 304675 Units X (385000 units / 415000 units) = 282650 Units Break Even Point of Replicas = 304675 Units X (30000 units / 415000 units) = 22025 Units Answer 4) After Tax Profit = $150000 Tax Rate = 30% Income Before Tax = $150000 X 100/70 = $214286 Break Even Point = $217812 (Fixed Cost) + $214286 (profit) /$1.21 (Cont. per Unit) = 357926 Units Break Even Point of Dolls = 357926 Units X (385000 units / 415000 units) = 283650 Units Break Even Point of Replicas = 357926 Units X (30000 units / 415000 units) = 22025 Units Answer 5) Statement of Profit Dolls Replicas Total Per Unit Total Per Unit Total Amount No of Units Sold 332000 83000 415000 Sales (A) $5.00 $1,660,000 $5.25 $435,750 $2,095,750 Less: Variable Costs Direct Material $0.74 $245,680 $0.62 $51,460 $297,140 Direct Labour $2.51 $833,320 $2.78 $230,740 $1,064,060 Variable Overhead $0.55 $182,600 $0.55 $45,650 $228,250 Total Variable Costs (B) $3.80 $1,261,600 $3.95 $327,850 $1,589,450 Contribution (C=A-B) $1.20 $398,400.00 $1.30 $107,900 $506,300 Fixed Cost Manufacturing Overhead $34,212 Selling & Administration Exp $183,600 Total Fixed Cost (D) $217,812 Profit (C-D) $288,488 Weighted Avg. Contribution Margin = $506300 (Total Contribution) / 415000 units (No of Units Sold) Weighted Avg. Contribution Margin = $1.22 per Unit Break Even Point = $217812 (Fixed Cost) /$1.22 (Cont. per Unit) = 178535 Units Break Even Point of Dolls = 178535 Units X (332000 units / 415000 units) = 142828 Units Break Even Point of Replicas = 178535 Units X (83000 units / 415000 units) = 35707 Units Answer 6) Statement of Profit Dolls Replicas Total Per Unit Total Per Unit Total Amount No of Units Sold 385000 30000 415000 Sales (A) $5.00 $1,925,000 $5.25 $157,500 $2,082,500 Less: Variable Costs Direct Material $0.74 $284,900 $0.62 $18,600 $303,500 Direct Labour $2.76 $1,062,985 $3.06 $91,740 $1,154,725 Variable Overhead $0.55 $211,750 $0.55 $16,500 $228,250 Total Variable Costs (B) $4.05 $1,559,635 $4.23 $126,840 $1,686,475 Contribution (C=A-B) $0.95 $365,365.00 $1.02 $30,660 $396,025 Fixed Cost Manufacturing Overhead $34,212 Selling & Administration Exp $183,600 Total Fixed Cost (D) $217,812 Profit (C-D) $178,213 Weighted Avg. Contribution Margin = $396025 (Total Contribution) / 415000 units (No of Units Sold) Weighted Avg. Contribution Margin = $0.95 per Unit Break Even Point = $217812 (Fixed Cost) /$0.95 (Cont. per Unit) = 228249 Units Break Even Point of Dolls = 228249 Units X (332000 units / 415000 units) = 211749 Units Break Even Point of Replicas = 228249 Units X (83000 units / 415000 units) = 16500 Units Answer 7) Statement of Profit Dolls Replicas Total Per Unit Total Per Unit Total Amount No of Units Sold 385000 30000 415000 Sales (A) $5.25 $2,021,250 $5.50 $165,000 $2,186,250 Less: Variable Costs Direct Material $0.74 $284,900 $0.62 $18,600 $303,500 Direct Labour $2.51 $966,350 $2.78 $83,400 $1,049,750 Variable Overhead $0.55 $211,750 $0.55 $16,500 $228,250 Total Variable Costs (B) $3.80 $1,463,000 $3.95 $118,500 $1,581,500 Contribution (C=A-B) $1.45 $558,250.00 $1.55 $46,500 $604,750 Fixed Cost Manufacturing Overhead $34,212 Selling & Administration Exp $183,600 Total Fixed Cost (D) $217,812 Profit (C-D) $386,938 Weighted Avg. Contribution Margin = $604750 (Total Contribution) / 415000 units (No of Units Sold) Weighted Avg. Contribution Margin = $1.46 per Unit Break Even Point = $217812 (Fixed Cost) /$1.46 (Cont. per Unit) = 149470 Units Break Even Point of Dolls = 149470 Units X (385000 units / 415000 units) = 138665 Units Break Even Point of Replicas = 149470 Units X (30000 units / 415000 units) = 10805 Units

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