PART V — COST-VOLUME-PROFIT (24 points) Harder Company manufactures a product th

Question

PART V — COST-VOLUME-PROFIT (24 points) Harder Company manufactures a product that sells for $50 per unit. Harder incurs a variable cost per unit of $30 and $3,400,000 in total fixed costs to produce this product. It is currently selling 200,000 units. Instructions: Complete each of the following requirements, presenting labeled supporting computations. (a) Compute and label the contribution margin per unit and contribution margin ratio. (b) Using the contribution margin per unit, compute the break-even point in units. (c) Using the contribution margin ratio, compute the break-even point in dollars. (d) Compute the margin of safety and margin of safety ratio. (e) Compute the number of units that must be sold in order to generate net income of $400,000 using the contribution margin per unit. (f) Should Harder give a commission to its salesmen based on 10% of sales, if it will decrease fixed costs by $400,000 and increase sales volume 10%? Support your answer with labeled computations.

Explanation / Answer

Answer:a)

Contribution margin per unit = Sales price per unit - variable cost per unit

Contribution margin per unit =$50 - $30 = $20 per unit

CM ratio = CM/ sales

CM ratio = $20*200000/$50*200000

= 4000000/10000000 = 0.4

Answer: b)

Break even points in units = Fixed expenses/Unit CM

Break even points in units = 3400000/20 = 170000

Answer: c)

Break even point in dollars = Fixed expenses/ CM ratio

Break even point in dollars = 3400000/0.4 = $8500000

Answer: d)

MOS = Actual sales - break even point in dollars

MOS = 50*200000 - 8500000= $1500000

MOS ratio = MOS/ actual sales

MOS ratio = 1500000/10000000 = 0.15

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